This document provides an overview of the Hyperion Business Modeling Solutions Guide. It discusses who should use the guide, how the guide is structured, conventions used in the guide, related documentation, accessing the online help, and additional support resources. The guide is intended for developers of activity-based management models, activity-based costing project leaders, and managers looking for solutions to business problems. It contains case studies demonstrating how to use the Model Approach and Hyperion Business Modeling to address common issues like product and customer profitability. Support resources include documentation, training, consulting services, and technical support.

1. Hyperion Business Modeling
®
Release 3.0
Solutions Guide
Hyperion Solutions Corporation
P/N: D503530000

2. © 2000-2002 Hyperion Solutions Corporation. All rights reserved.
Hyperion, Essbase, Hyperion Analyzer, Hyperion Business Modeling and the “H” logo are
registered trademarks of Hyperion Solutions Corporation. Hyperion Solutions is a trademark
of Hyperion Solutions Corporation.
Economic Value Add (“EVA”) is a registered trademark of Stern Stewart & Co. All other
brand and product names are trademarks or registered trademarks of their respective holders.
No portion of this manual may be reproduced or transmitted in any form or by any means,
electronic or mechanical, including photocopying, recording, or information storage and
retrieval systems, for any purpose other than the purchaser’s personal use, without the express
written permission of Hyperion Solutions Corporation.
Notice: The information contained in this document is subject to change without notice.
Hyperion Solutions Corporation shall not be liable for errors contained herein or
consequential damages in connection with the furnishing, performance, or use of this material.
Hyperion Solutions Corporation
1344 Crossman Avenue
Sunnyvale, CA 94089

3. Contents
Preface ......................................................................................................................... vii
Who Should Use This Guide .................................................................................... vii
Document Structure ........................................................................................................ viii
Conventions ....................................................................................................................... ix
Related Documentation ...................................................................................................... x
Online Help ....................................................................................................................... xi
Viewing the Online Guide ......................................................................................... xi
Printing the Online Guide ....................................................................................... xiii
Additional Support .......................................................................................................... xiv
Documentation ......................................................................................................... xiv
Education Services .................................................................................................. xiv
Consulting Services .................................................................................................. xv
Technical Support ..................................................................................................... xv
Chapter 1: Introduction ....................................................................................... 17
What You Gain ................................................................................................................. 17
Before You Start ............................................................................................................... 18
Using the Case Studies ..................................................................................................... 18
How the Case Studies are Organized........................................................................ 18
How to Use the Case Studies .................................................................................... 19
The Case Studies .............................................................................................................. 19
Chapter 2: Your Business Issues ................................................................... 21
Managing Capacities and Constraints .............................................................................. 21
Measuring Customer and Product Profitability ................................................................ 22
Controlling Costs .............................................................................................................. 22
Hyperion Business Modeling Solutions Guide s iii

4. Justifying Investment and Re-engineering ....................................................................... 23
Planning Process Improvements ...................................................................................... 23
Introducing a New Product ............................................................................................... 24
Where to Find the Case Studies ....................................................................................... 24
Chapter 3: The Model Approach ..................................................................... 25
Step 1: Defining the Project Scope................................................................................... 26
Step 2: Identifying Activities, Resources, and Measures ................................................. 26
Step 3: Developing the Schematic.................................................................................... 27
Step 4: Collecting Data and Rules .................................................................................... 28
Step 5: Building the Model .............................................................................................. 29
Step 6: Validating the Results .......................................................................................... 29
Step 7: Interpreting the New Activity-Based Information ............................................... 30
Step 8: Performing Activity-Based Management ............................................................ 30
Chapter 4: Product Profitability Case Study ............................................ 31
Business Issue ................................................................................................................... 32
Marketing Analysis ................................................................................................... 32
Cost Analysis ............................................................................................................ 33
Activity Based Management Solution Result .................................................................. 33
Activity-based Costing (ABC) Results ..................................................................... 33
How the Solution was Developed .................................................................................... 34
Supporting The Model Approach ............................................................................. 34
Step 1: Defining the Project Scope ........................................................................... 35
Step 2: Identifying Activities, Resources, and Measures ......................................... 35
Step 3: Developing the Schematic ............................................................................ 36
Interpreting the OK Plastics Schematic .................................................................... 40
Step 4: Collecting Data and Rules ............................................................................ 42
Step 5: Building the Model ....................................................................................... 51
Step 6: Validating the Results ................................................................................... 55
Activity-Based Cost Analysis .......................................................................................... 60
Step 7: Interpreting New Information ....................................................................... 60
Activity-Based Management ............................................................................................ 64
Step 8: Performing Activity-Based Management ..................................................... 64
Finding a Solution to Product Profitability ............................................................... 64
iv s Hyperion Business Modeling Solutions Guide

5. Calculating the Scenario ........................................................................................... 73
Next Steps ................................................................................................................. 73
Chapter 5: Customer Profitability Case Study ........................................ 75
Business Issue .................................................................................................................. 76
Market Conditions .................................................................................................... 77
Current Costs ............................................................................................................ 77
Profit/Loss Projection ............................................................................................... 78
ABM Solution Result ....................................................................................................... 78
Activity-based Costing (ABC) Results .................................................................... 79
Activity-based Management Strategy ...................................................................... 80
How the Solution was Developed .................................................................................... 80
Supporting The Model Approach ............................................................................. 80
Step 1: Defining the Project Scope ........................................................................... 81
Step 2: Identifying Activities, Resources, and Measures ......................................... 81
Step 3: Developing the Schematic ............................................................................ 82
Step 4: Collecting Data and Rules ............................................................................ 87
Step 5: Building the Model ...................................................................................... 95
Step 6: Validating the Results ................................................................................ 101
Activity-Based Cost Analysis ........................................................................................ 105
Step 7: Interpreting New Information .................................................................... 105
Activity-Based Management .......................................................................................... 111
Step 8: Performing Activity-Based Management................................................... 111
Calculating the Scenario ......................................................................................... 117
Next Steps ............................................................................................................... 120
Chapter 6: Improving Economic Profit Case Study ........................... 121
Economic Profit Concepts.............................................................................................. 121
Business Issue ................................................................................................................ 123
Company Profile ............................................................................................................ 124
Product Lines .......................................................................................................... 124
Strategy ................................................................................................................... 125
EP Solution Results ........................................................................................................ 126
Business Modeling Strategy ................................................................................... 126
Hyperion Business Modeling Solutions Guide s v

6. How the Solution was Developed .................................................................................. 128
Supporting The Model Approach ........................................................................... 128
Step 1: Defining the Project Scope ......................................................................... 128
Step 2: Identifying Activities, Resources, and Measures ....................................... 129
Step 3: Developing the Schematic .......................................................................... 130
Interpreting the OK Plastics’ Schematic ................................................................. 134
Step 4: Collecting Data and Rules .......................................................................... 136
Step 5: Build the Model .......................................................................................... 146
Adding Changes to Model EP ................................................................................ 149
Step 6: Validating the Results ................................................................................. 163
Activity-Based Cost Analysis ........................................................................................ 167
Step 7: Interpreting New Information ..................................................................... 167
Activity-Based Management .......................................................................................... 172
Step 8: Performing Activity-Based Management ................................................... 172
Evaluating the Impact of New Process Technology on Economic Profit .............. 174
Calculating the Scenario ......................................................................................... 177
Next Steps ............................................................................................................... 178
Chapter 7: Next Steps ........................................................................................ 179
Appendix A: Concepts ....................................................................................... 181
Activity-Based Costing and Management ...................................................................... 181
The Problem of Indirect Costs ................................................................................ 181
Activity-Based Costing ........................................................................................... 182
Process Modeling .................................................................................................... 182
Activity-Based Management .................................................................................. 183
Solution .......................................................................................................................... 184
Index ............................................................................................................................ 185
vi s Hyperion Business Modeling Solutions Guide

7. Preface
This guide introduces you to building Hyperion Business Modeling models and
using them to solve business issues. It explains the Hyperion Business Modeling
features and options and contains case studies that implement the model building
method, The Model Approach®.
This preface includes the following topics:
q “Who Should Use This Guide” on page vii
q “Document Structure” on page viii
q “Conventions” on page ix
q “Related Documentation” on page x
q “Online Help” on page xi
q “Additional Support” on page xiv
Who Should Use This Guide
This guide is intended for developers of activity-based management models,
activity-based costing project leaders, and managers who are looking for a solution
to their business problems.
Hyperion Business Modeling Solutions Guide s vii

8. Preface
Document Structure
This document contains the following information:
q Chapter 1, “Introduction,” provides an overview to the entire guide, including
how to use the guide, the benefits of following the case studies, and a brief
description of the enclosed case studies.
q Chapter 2, “Your Business Issues,” describes some of the financial and
operational problems organizations commonly face in today’s business
environment.
q Chapter 3, “The Model Approach,” describes the eight-step methodology for
building models using Hyperion Business Modeling to solve common
business problems.
q Chapter 4, “Product Profitability Case Study,” is a case study of a
manufacturing company and how it uses The Model Approach and Hyperion
Business Modeling to address product profitability issues.
q Chapter 5, “Customer Profitability Case Study,” is a case study of a service
company and how it uses The Model Approach and Hyperion Business
Modeling to address customer profitability issues.
q Chapter 6, “Improving Economic Profit Case Study,” is a case study
demonstrating the application of Economic Profit (Economic Value Add or
EVA) to evaluate proposed initiatives on the profitability of a manufacturing
company.
q Chapter 7, “Next Steps,” directs you to sources of support and information to
help you launch your own activity-based management project.
q Appendix A, “Concepts,” describes the underlying principles of the product.
viii s Hyperion Business Modeling Solutions Guide

9. Preface
Conventions
The following table shows the conventions used in this document:
Item Meaning
➤ Arrows indicate the beginning of a procedure that
consists of sequential steps.
Bold Bold text indicates words or characters that you type
exactly as they appear on the page. Bold in procedural
steps highlights major interface elements.
CAPITAL LETTERS Capital letters denote commands and various IDs.
(Example: CLEARBLOCK command)
Ctrl + 0 Keystroke combinations shown with the plus symbol
(+) indicate that you should press the first key and
hold it while you press the next key. Do not type
the + symbol.
Courier italics Courier italic text indicates a variable field in command
syntax. Substitute a value in place of the variable shown
in Courier italics.
Ellipses (...) Ellipsis points indicate that text has been omitted from
an example.
Example text Courier font indicates that the material shown is a code
or syntax example.
Italics Document titles are shown in italics.
Mouse orientation This document provides examples and procedures using
a right-handed mouse. If you use a left-handed mouse,
adjust the procedures accordingly.
Menu options Options in menus are shown in the following format:
Menu name > Menu command > Extended menu
command
For example: File > Desktop > Accounts
n, x The variable n indicates that you must supply a generic
number; the variable x indicates that you must supply a
generic letter.
Hyperion Business Modeling Solutions Guide s ix

10. Preface
Related Documentation
Hyperion Solutions provides the following related documentation for this product:
q The Hyperion® Business Modeling Installation Checklist provides a
high-level list of tasks required to install Hyperion Business Modeling. The
checklist also supplies information regarding additional templates that are
shipped with Hyperion Business Modeling, and identifies other available
product-related tools and documentation.
q The Hyperion® Business Modeling New Features describes the new or
enhanced features for this release.
q The Hyperion® Business Modeling Model Builder’s Guide explains the
features and options of Hyperion Business Modeling, and contains the
concepts, processes, procedures, formats, tasks, and examples that you need
to use the software to build a model or enterprise model.
q The Hyperion® Business Modeling Results Analysis and Reports Guide
discusses saving and analyzing reports, and contains an explanation of how to
access calculated results and project information reports for models and
enterprise models.
q The Hyperion® Business Modeling Solutions Guide provides information
about building models and using them to solve business issues and maximize
profitability. The guide explains the Hyperion Business Modeling features and
options, and contains case studies that implement the model building method,
The Model Approach®.
q The Hyperion® Business Modeling Hyperion Analyzer Views Guide explains
how to view Hyperion® Business Modeling results using Hyperion®
Analyzer.
q Hyperion® Business Modeling Database Tables Reference is a reference
guide for Database Administrators that describes the Hyperion Business
Modeling database schema.
All documentation for the software is available from the Hyperion Business
Modeling Information Map. To access the Information Map, select Help >
Information Map.
x s Hyperion Business Modeling Solutions Guide

11. Preface
Online Help
The Hyperion Business Modeling Solutions Guide is available in an online PDF
format, which can be used to view the guide online, or print the document, as
outlined in the following procedures:
q “Viewing the Online Guide” on page xi
q “Printing the Online Guide” on page xiii
Viewing the Online Guide
The PDF version of the Hyperion Business Modeling Solutions Guide is available
from the Information Map in the application.
➤ To display the online guide:
1. Select Help > Information Map from the main menu of the application.
The Hyperion Business Modeling Information Map is displayed.
Hyperion Business Modeling Solutions Guide s xi

12. Preface
2. Double-click Solutions Guide.
The online PDF version of the Solutions Guide is displayed. The cover of the
online manual is displayed in the right frame, and a list of all topics and
sub-topics is presented in the Bookmarks tab in the left frame. The PDF
version is fully hyperlinked and indexed to make it easy to find and jump to
related topics.
3. In the Bookmarks tab, click the topic that you want to view. The first page of
the selected section displays in the right frame.
xii s Hyperion Business Modeling Solutions Guide

13. Preface
Printing the Online Guide
➤ To print the guide or a range of pages:
1. Select Help > Information Map from the main menu of the application.
The Hyperion Business Modeling Information Map is displayed.
2. Double-click Solutions Guide on the Information Map.
The PDF version of the guide is displayed.
3. Select File > Print.
The Print window displays.
4. Select your requirements for the print job, such as the portion of the document
that you want to print, whether you want to print double-sided, and so on.
5. Click OK to submit the print job.
Tip: Screen shots are a low resolution image type. If the printed screen shots are
unreadable and you are using a non-PostScript printer, upgrade to an Acrobat 4.0
viewer. If you do not have Adobe Acrobat Reader, you can download the most current
version free from Adobe’s Web site at www.adobe.com.
Hyperion Business Modeling Solutions Guide s xiii

14. Preface
Additional Support
In addition to providing the documentation and online help, Hyperion offers the
following support for product information.
Documentation
A complete set of documentation is included in PDF or HTML format, or in the
form of online help as part of the installed product. For more information on how
to order printed documentation, visit our Web site at
http://www.hyperion.com, call Customer Service at 877-901-4975, or
contact your local support office.
Education Services
Hyperion offers a variety of training options, including instructor-led training,
custom training, and eTraining. This education covers all Hyperion applications
and technologies and is geared to administrators, end users, and information
systems (IS) professionals.
Instructor-led training is delivered in formats and in locations suited to Hyperion’s
diverse, global customers. Hyperion Authorized Training Centers are certified
to deliver courses developed by Hyperion. Custom Education Services—training
on the configured and tailored applications that employees use on the job—is
another option to enhance user productivity and to ensure smooth day-to-day
operations. eTraining—including computer-based training, Web-based training,
and interactive Virtual Classroom training—provides a cost-effective means
of giving users a hands-on introduction to product features and functions.
Computer-based training (CBT) and Web-based training (WBT) provide
high-quality, self-paced training at the user’s convenience, regardless of location.
For more information about training, contact your Regional Education Manager or
visit our Web site at http://www.hyperion.com to see a list of all training
classes.
xiv s Hyperion Business Modeling Solutions Guide

15. Preface
Consulting Services
Hyperion Consulting Services assists customers in maximizing the use of, and the
return on investment in, Hyperion products. Experienced Hyperion consultants
and Hyperion Alliance Partners assist organizations in tailoring solutions to their
particular requirements, such as reporting, analysis, modeling, and planning.
Specific services include implementation consulting, custom business solutions,
data integration, and technical consulting. Additionally, Hyperion offers a variety
of Services Packages and Reviews.
For more information about Consulting Services, Services Packages, and
Reviews, as well as the services offered by Alliance Partners, contact your local
consulting services representative or visit our Web site at
http://www.hyperion.com to see a list of all Hyperion Alliance Partners.
Technical Support
Hyperion provides telephone and Web-based support to ensure that clients resolve
product issues quickly and accurately. This support is available for all Hyperion
products at no additional cost to clients with a current maintenance agreement.
q For Hyperion Solutions Customer Service, call 877-901-4975. A complete list
of all local Customer Service numbers is available on the Information Map
under Contacts.
q For Web-based support or to see complete information on available support
options, visit our Web site at http://www.hyperion.com.
When standard support does not meet specific requirements, a Hyperion support
package that meets your needs can usually be designed. For more information,
contact your local Customer Service office.
Hyperion Business Modeling Solutions Guide s xv

16. Preface
xvi s Hyperion Business Modeling Solutions Guide

17. Chapter Introduction
1
This guide demonstrates how Hyperion® Business Modeling can provide solutions
to the challenges facing your business. Realistic case studies illustrate and address
contemporary business issues using activity-based management models. Each
study gives the vital statistics used to build the model in the case and describes how
the model is built using a proven, industry-tested methodology, The Model
Approach® (TMA).
The following sections introduce you to the Solutions Guide, describe how to use
the guide to its fullest advantage, and what to expect from the case studies inside:
q “What You Gain” on page 17
q “Before You Start” on page 18
q “Using the Case Studies” on page 18
q “The Case Studies” on page 19
What You Gain
At the end of a case study, you will understand the following concepts:
q The typical business issues Hyperion Business Modeling can address
q The kinds of solutions Hyperion Business Modeling can provide
q The process of developing a model using Hyperion Business Modeling
q The value of scenario-playing in planning the future of your business
q The ability to apply the concepts of Economic Profit to the models that you
create
Hyperion Business Modeling Solutions Guide s 17

18. Introduction
Before You Start
Familiarity with some common business challenges will help you better
understand the problems in the case studies and their solutions.
q Business Issues
Read Chapter 2, “Your Business Issues,” to grasp the kinds of situations that
businesses are frequently forced to address, such as operational capacities,
profitability, market growth, and cost control, to name a few.
q The Model Approach®
The Model Approach (TMA) is an eight-step methodology for constructing
models using Hyperion Business Modeling. It shows you how to build
effective models, use results to support decisions, and play scenarios using the
program.
For an introduction to TMA, see Chapter 3, “The Model Approach.”
Using the Case Studies
The case studies represent a subset of Hyperion Business Modeling’s capabilities.
We encourage you to take your time to understand the details of the models, but
an in-depth study of the data provided is not essential to understand the
management value of the software.
You will learn more from the case studies if you understand how the studies are
organized.
How the Case Studies are Organized
Each case study is presented in the following sections:
q Summary: Brief statements of the business issue and solution
q Business Issue: A brief profile of the company and a description of its business
challenges
q Business Modeling Solution Result: A description of how activity-based
costing located the real problem and how activity-based management found
the solution
q How the Solution was Developed: A detailed description of how the solution
was found using TMA
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19. Introduction
1
How to Use the Case Studies
q Highlight the case study that most interests you and follow its story to see how
the eight steps outlined by TMA are applied.
q Using the software, play the scenarios described in the case study. It takes
about 45 minutes to work through a case study.
q Use the scenario tutorial to evaluate suggested management and operational
strategies. Or, test some of your own.
The Case Studies
Each case study contains a company description, an issue, and a management
resolution:
Case Study Business Issue Description
Manufacturing: Product Competition for one of OK Plastics’s
OK Plastics Profitability product lines calls for a review of
product and pricing mix.
Service: Customer OK Service Bureau management
OK Service Profitability wants to understand the effects of
Bureau increased demand for its billing
services and aggressive competition.
Manufacturing: Economic Profit Management needs to evaluate the
OK Plastics impact that purchasing new process
technology will have on the
organization.
Hyperion Business Modeling Solutions Guide s 19

20. Introduction
20 s Hyperion Business Modeling Solutions Guide

21. Chapter Your Business Issues
2
Hyperion Business Modeling can help you address important challenges faced by
most industries today, such as:
q “Managing Capacities and Constraints” on page 21
q “Measuring Customer and Product Profitability” on page 22
q “Controlling Costs” on page 22
q “Justifying Investment and Re-engineering” on page 23
q “Planning Process Improvements” on page 23
q “Introducing a New Product” on page 24
See “Where to Find the Case Studies” on page 24 to locate where each of the
previous business issues are addressed in the case studies.
Managing Capacities and Constraints
To respond to increased demand, companies must know where their capacity
limits exist, what the limits are, and options for improving capacity. Capacity
planning helps managers foresee the need for replacing or improving their human
and physical resources. It also helps them plan for outsourcing on a temporary or
seasonal basis when internal improvements and expansion are not feasible.
Using Hyperion Business Modeling, you can efficiently maximize revenues, avoid
bottlenecks from increased workloads, and plan for demand variations.
Hyperion Business Modeling Solutions Guide s 21

22. Your Business Issues
Measuring Customer and Product Profitability
A large part of business success is knowing your customers and product lines. How
profitable are they? Could they be more profitable? Knowing the answers enables
you to manage your customers, products, and, as a result, your operations and your
profits.
As both a process modeling and costing application, Hyperion Business Modeling
can:
q Calculate customer and product revenues, costs, and profits from the activities
and resources of your operation.
q Identify process costs and cost drivers on activities that are associated with
products and customers.
q Make direct financial comparisons among customers or products, uncovering
weak product lines or customers who cost more than they are worth to service.
Hyperion Business Modeling can also model profitability by region, channel, and
facility.
Controlling Costs
Effective cost control relies on knowing what your true costs are and what part of
your business operation will be affected by resource and supply price increases.
Modeling your business and testing cost initiatives can reveal savings in
unexpected places.
Hyperion Business Modeling lets you model your business and test cost strategies
to support your cost control initiatives.
22 s Hyperion Business Modeling Solutions Guide

23. Your Business Issues
Justifying Investment and Re-engineering
Managers must weigh the costs and benefits of increasing capital and staff before
making the costly decision to proceed. Modeling the changes can help make that 2
decision.
Similarly, modeling the changes makes Economic Profit (EP) analysis possible.
Economic Profit (also known as Economic Value Add or EVA) accounts for the
cost of capital for investment and the returns from that investment, thus amortizing
the expense over the period of time in which the benefits are reaped. EP is also
associated with shareholder wealth. If your business earns a rate of return higher
than the cost of capital, the value of the company increases.
You can use Hyperion Business Modeling to take a longer view of an investment,
showing bottom-line impacts beyond the investment year. Applying economic
profit formulas to existing models enables you to evaluate business decisions in
terms of creating or keeping value for the company, based on the capital costs
involved in implementing business strategies.
Planning Process Improvements
Activity-based management can uncover the hidden costs of two kinds of
activities:
q Those that do not add value to either the company or its customers
q Those that could be carried out with greater efficiency
Process improvement initiatives, performance innovations, and the introduction of
new products and services can make companies more responsive to market
demands and create the conditions for long-term growth and profitability.
With Hyperion Business Modeling, you can develop and test multiple scenarios
without risk. You can compare potential performance improvements and evaluate
the operational and financial impact of various production and management
strategies by making changes to:
q The model’s data (for example, costs, revenues, capacities)
q The model itself (for example, adding a resource)
Hyperion Business Modeling Solutions Guide s 23

24. Your Business Issues
Introducing a New Product
Hyperion Business Modeling can predict the ripple effect of introducing new
products throughout an organization. A modestly profitable product might strain
production capacities and inhibit expanding production of a more profitable
product. Or it might, in fact, increase overall profitability by sharing more of the
company’s overhead costs.
Where to Find the Case Studies
The check marks in the following table show which business issues are addressed
in each of the case studies in this guide:
Service:
Manufacturing: OK Service Economic Profit:
OK Plastics Bureau OK Plastics
Business Issue Chapter 4 Chapter 5 Chapter 6
Managing Capacities and
Constraints
✔ ✔ ✔
Measuring Customer and
Product Profitability
✔ ✔ ✔
Controlling Costs
✔ ✔
Justifying Investment and
Re-engineering (Economic ✔ ✔
Profit)
Introducing a New Product
✔
24 s Hyperion Business Modeling Solutions Guide

25. Chapter The Model Approach
3
The Model Approach® (TMA) is an established eight-step process used to
implement an activity-based management project. Successful activity-based
management projects have been completed in manufacturing, service, finance,
health care, and other sectors.
The steps of the process are briefly described in this chapter:
q “Step 1: Defining the Project Scope” on page 26
q “Step 2: Identifying Activities, Resources, and Measures” on page 26
q “Step 3: Developing the Schematic” on page 27
q “Step 4: Collecting Data and Rules” on page 28
q “Step 5: Building the Model” on page 29
q “Step 6: Validating the Results” on page 29
q “Step 7: Interpreting the New Activity-Based Information” on page 30
q “Step 8: Performing Activity-Based Management” on page 30
Hyperion Business Modeling Solutions Guide s 25

26. The Model Approach
Step 1: Defining the Project Scope
Define the parameters of your project by identifying:
q The area or areas of the organization to be modeled
q The major services or products that this area provides (in other words, the
demands)
q The length of time and number of people needed to complete the project
Step 2: Identifying Activities, Resources, and
Measures
To find out what processes and resources the organization uses to deliver services
or products, this step requires you to conduct interviews and activity analysis to
identify:
q The major activities of the area or areas being studied
q The resources needed to perform these activities
q An appropriate unit to measure each activity and resource
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27. The Model Approach
Step 3: Developing the Schematic
You create a schematic or graphical representation of the activities and resources
identified in Step 2. This schematic depicts and clarifies the relationships among
the demands, activities, and resources of the project area.
Schematic Symbols
The schematic uses eight symbols (boxes and their connectors) to represent the 3
components of the area being studied.
Supply Boxes
These symbols represent supply of a variable resource (for example,
raw materials).
Resource Boxes
Resource boxes represent resources that are consumed in fixed
amounts within a time period. They may be resources whose costs
are committed for the time period being modeled (such as a machine
or a labor pool). Fixed resources have period costs associated with
them.
Activity Boxes
These symbols represent activities performed to support the delivery
of the area’s product or services (such as order processing, assembling
products, supervising employees). Activities do not have costs
associated with them.
Route Boxes
These symbols represent a choice of inputs to an activity or final
outputs, such as a product or service. For example, you can choose
regular or overtime labor hours to support an activity and decide how
much of each you use.
Hyperion Business Modeling Solutions Guide s 27

28. The Model Approach
Summary Boxes
These symbols group activities and resources that are always used
together.
Inventory Boxes
These symbols are used to carry items (and their costs) forward from
one period to the next. For example, finished goods can be assembled
in one period and sold in another period.
Demand Boxes
These symbols represent the outputs of the area of study. For
example, producing a manufactured product, or providing an internal
or external service.
Connectors
Although not modeling symbols, connectors are used to simplify the presentation
of the schematic. A connector is used to show where a link (in other words, a
relationship) exists between boxes in the schematic.
Step 4: Collecting Data and Rules
During this step, you gather the relevant operational and financial data. The
schematic developed in Step 3 serves as the roadmap to identify the data required.
Required data includes:
q Demand volumes: The amount of output produced for the period of the model
q Factors: For example, the amount of a resource that is required to generate a
unit of activity
q Capacities: The maximum units of output actually available from a resource
for the time period of the model
q Financial Data: Costs and/or revenues that are associated with a resource
28 s Hyperion Business Modeling Solutions Guide

29. The Model Approach
Step 5: Building the Model
Using the schematic developed in Step 3 and the data collected in Step 4, you
create a model that includes the following types of information:
Type of Information Includes
Project Information Model title
Time period 3
Global Data Units of measure
Variables
Revenue and cost categories
Boxes (graphical symbols) Name and Box ID (identifier)
Unit of measure
Operational and financial data as identified
on the schematic
The software confirms that the data used to define the model conforms to the rules
of process model building. Once verified, the model can be used to produce
operational and financial results.
Step 6: Validating the Results
After the model is verified for logical flow, the model must be validated for
accuracy. Operational validation is done before financial validation, because the
financial results are based on the operational flow.
q Operational Validation: Operational results generated by the model reflect the
historical experience of the project area for the period being modeled.
q Financial Validation: After any operational inconsistencies in the model are
corrected, total costs and revenue generated by the model are compared to the
actual experience of the project area. Financial validation ensures consistency.
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30. The Model Approach
Step 7: Interpreting the New Activity-Based
Information
The validated model provides new information about the project area.
q New Operational Information: The model provides the utilization rates for
resources. These rates help identify inefficiencies, bottlenecks, and idle
capacity issues.
q New Financial Information: You can use the model to cost products, services,
or any activity in the project area. The results can reveal hidden losses and
profits.
q Improvement Opportunities: Combining financial and operational data
enables you to identify non-value added activities and to prioritize areas for
process improvement.
Step 8: Performing Activity-Based Management
After the model is verified and reviewed, you can use it to evaluate what-if
scenarios. These scenarios let you evaluate different possibilities within the project
area before implementing them.
Typical uses of what-if scenario-playing include:
q Preparing activity-based budgets
q Evaluating opportunities for improving productivity and reducing costs
q Identifying ways to improve customer, product, and channel profitabilities
q Testing potential scenarios and evaluating their consequences
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31. Chapter Product Profitability Case
4 Study
OK Plastics Inc. took operational, financial, and marketing initiatives to reverse
the sagging profitability of its three product lines. Using The Model Approach, the
firm uncovered cost, revenue, and profit distortions created by its standard
accounting system.
OK Plastics introduced activity-based management techniques to target greater
efficiencies, plan marketing strategies, and shift and expand existing resources.
One scenario suggested a 240% increase in overall profitability, pointing the
company to a more promising direction.
The case study is broken down into the following sections:
q “Business Issue” on page 32
q “Activity Based Management Solution Result” on page 33
q “How the Solution was Developed” on page 34
– “Step 1: Defining the Project Scope” on page 35
– “Step 2: Identifying Activities, Resources, and Measures” on page 35
– “Step 3: Developing the Schematic” on page 36
– “Step 4: Collecting Data and Rules” on page 42
– “Step 5: Building the Model” on page 51
– “Step 6: Validating the Results” on page 55
q “Activity-Based Cost Analysis” on page 60
– “Step 7: Interpreting New Information” on page 60
q “Activity-Based Management” on page 64
– “Step 8: Performing Activity-Based Management” on page 64
Hyperion Business Modeling Solutions Guide s 31

32. Product Profitability Case Study
Business Issue
The OK Plastics company manufactures three lines of products:
q Product A: High volume, simple products produced in large batches
q Product B: Medium volume, more complex products
q Product C: Low volume, small order, highly complex products
OK Plastics has lost total market share. Product analysis reveals that stagnant
growth among some products cannot compensate for the market share decline in
others.
In response to this problem, OK Plastics has ordered the following business studies
for each of its product lines:
q Marketing Analysis
q Cost Analysis
Marketing Analysis
A summary of the Marketing Department’s report on the three product lines
appears below:
Product Line A
q The market share for Product Line A dropped from 50% to 25% over a
two-year period. A major competitor has consistently priced its comparable
products 5% below the Product Line A equivalent.
q Sales volumes for Product Line A will continue to decline unless a lower price
can be offered.
q Current product profitability analysis shows that the company cannot afford to
drop the price for Product Line A.
Product Line B
q OK Plastics maintained a consistent market share of 15% over the past two
years, experiencing only minor fluctuations in a relatively stable economy.
q Not enough product cost data exists to make price changes.
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33. Product Profitability Case Study
Product Line C
q A high profit margin in this product line gives OK Plastics room to increase
sales volumes and market share through a 10% price discount.
q One study suggests that the market is so elastic that such a price discount could
double sales.
Cost Analysis
Using standard costing, the Accounting Department prepared a profitability
analysis by product line using the current year’s data.
Current Year Product Line A Product Line B Product Line C 4
Volume (000) pieces 1000 500 150
Selling price/piece $2.450 $3.550 $5.900
Total cost/piece $2.269 $3.163 $4.501
Income/piece $0.181 $0.387 $1.399
Total profit ($000) $181 $193 $209
Activity Based Management Solution Result
The activity-based management solution begins with determining the
activity-based costs of OK Plastics and continues with a what-if scenario played
in the OK Plastics model. These scenarios point the company in a more profitable
direction.
Activity-based Costing (ABC) Results
The activity-based management project revealed that Product Line C was
undercosted. Costs that should have been charged to Product Line C were, in fact,
carried by the other product lines, making them appear less profitable than they
really were. So, the pricing strategies suggested by the standard costing method
seemed now irrelevant with more accurate costing methods.
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34. Product Profitability Case Study
The table below compares standard costs to activity-based costs (ABC) for all
product lines:
Current Year Product Line A Product Line B Product Line C
Standard ABC Standard ABC Standard ABC
Volume 1000 1000 500 500 150 150
Price/piece $2.450 $2.450 $3.550 $3.550 $5.900 $5.900
Cost/piece $2.269 $1.891 $3.163 $2.854 $4.501 $8.064
Income/piece $0.181 $0.559 $0.387 $0.696 $1.399 $-2.164
Total Profit $181.00 $559.48 $193.00 $348.13 $209.00 -$324.54
How the Solution was Developed
This section describes the journey taken by the activity-based management team
using The Model Approach as its map. You will see how the solution unfolds from
defining the project scope in step 1 to revealing new possibilities in step 8.
Supporting The Model Approach
The management in OK Plastics has given full support to a multi-disciplinary team
assigned to develop an activity-based management model using The Model
Approach. See Chapter 3, “The Model Approach,” for a description of the
eight-step methodology.
Before starting the project, the team secured management’s commitment to
providing project resources, including staff time, to the project. Team members
also attended The Model Approach workshop to understand the essential concepts
of process modeling and acquire practical software training for carrying out the
project successfully.
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35. Product Profitability Case Study
Step 1: Defining the Project Scope
The OK Plastics’s activity-based management team performed the following tasks
for Step 1 of The Model Approach:
1. Identify the areas of study.
2. Select the model time period.
3. Determine the project demands.
4. Identify the activities required to complete the project.
5. Identify available resources to assist in the project.
6. Establish the time frame to complete the project.
7. Find a reliable reporting mechanism for distributing and analyzing the results. 4
For this activity-based costing study, the project team decided to focus on the cost
and profitability of the products produced by OK Plastics. Therefore, the three
product lines became the model’s demands.
The study decided that the model should take a macro view of the organization and
include all the operations and resources of the company. The multi-functional
team believes it can obtain meaningful results in six weeks.
Step 2: Identifying Activities, Resources, and Measures
The team identified the resources, associated activities, and units of measure
required to deliver the services or products identified by the project scope.
After interviewing the appropriate representatives from operations, the team
identified the following activities, resources, and units of measure:
Activities/Resources Unit of Measure
Operators Operator Hours (OperHrs)
Maintenance Mechanics Mechanic Hours (MechHrs)
Supervision People (#People)
Building (Occupancy Costs) Square Feet (SqFt)
Molding Machines Machine Hours (MchHrs)
Raw Materials (Resin & Additives) Thousand Pieces (Pcs [000])
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36. Product Profitability Case Study
Activities/Resources Unit of Measure
Energy Megawatt Hours (MWh)
Machine Supplies Machine Hours (MchHrs)
Molding Process Machine Hours (MchHrs)
Set Ups Setups (#Setups)
Sales and Marketing Calls (#Calls)
Order Processing Orders (#Orders)
Computer Services Orders (#Orders)
Advertising Ads (#Ads)
Step 3: Developing the Schematic
At this stage, the team prepared an operational schematic, a diagram which
represents the interrelationships among an organization’s resources, activities, and
demands.
The following pages show the operational schematic developed for OK Plastics
from the findings of Step 2. For the schematic containing all the model data up
through Step 3, see “OK Plastics Schematic 1” on page 39.
A description of how to interpret the model follows the schematic.
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37. Product Profitability Case Study
OK Plastics Schematic Box Definitions
Each box in the schematic is assigned a unique box identifier and name. The
following boxes are used in the OK Plastics schematic to represent the demands,
activities, and resources identified in Step 2:
Demand Boxes
Box ID Box Name Description
DEMA Demand A Demand for product line A
DEMB Demand B Demand for product line B
DEMC Demand C Demand for product line C 4
Activity Boxes
Box ID Box Name Description
MLDPRO Molding Process Process of manufacturing pieces
ORDPRO Order Processing Activities for processing orders
SALMKT Sales & Marketing Activities for sales and marketing
SETUP Setting up Activities to set up machines
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38. Product Profitability Case Study
Resource Boxes (Fixed)
Box ID Box Name Description
MAINMCH Maintenance People keeping machines in good repair
Mechanics
MCAP Machinery Capital Capital charges for machinery
Charge
MLDMC Molding Machines Machines for product manufacturing
OCCY Occupancy OK Plastics’s building facility
OPRL Operators People handling the machines
ORDDEPT Order Processing Resources for processing orders
Department
SPVN Supervision All supervisors
Supply Boxes (Variable)
Box ID Box Name Description
ADVT Advertising Advertising for product lines A, B, and
C
COMP Computer Computers used by order processing
ENERGY Energy Energy to run the machines
MTLA Material A Raw materials required for product lines
A, B, and C
MTLB Material B
MTLC Material C
OPEROT Operator Overtime Overtime hours performed by operators
SUPL Machine Supplies Consumable supplies for the molding
process
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39. Product Profitability Case Study
OK Plastics $
OCCY
c= $ COMP
Schematic 1 Sq #Orders
$ c=
$ MLDMC c= $ $ SALDEPT c=
MCAP c= ORDDEPT
Molding Machinery Sales & Order
Machines Capital
MchH MchH #Call #Orders
MLD MCA $ SALMKT c= $
$ ORDPRO c=
Sales &
$ Order
$ #Call #Orders
SPVN c= SLM
Supervision ORDP
$ c=
OPEROT #Peop
Operator
Oper c= $ $
MAINMC c= ENERGY
$
OPRL
Operators
H Energy
MWh
4
MechHrs ENER
Oper
$ c= OPERCH $ ADVT
SUPL Operator Choice
Machine Advertising
Oper #Ads
Mch MLD ENER
MLD ENER ADV
MLDPRO SETUP
Molding
Mch #Set
MLDP SET
$ MTLA $ $
MTLB MTLC
Pcs(000) Pcs(000) Pcs(000)
MLDPRO SETUP SLMKTORDPROADVT SLMKT ADVT MLDP SETUP SLMKT
ORDPRO ADVT
MLDP SET
ORDPRO
PRSA SASA PRSB PRSC SASC
SASB
Production Sales & Admin Production Sales & Admin Production Sales & Admin
$ v= v= $ v=
DEMA $ DEMC
DEMB
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40. Product Profitability Case Study
Interpreting the OK Plastics Schematic
Since the requirements for activities are demand driven, the operational results of
the OK Plastics model will be calculated using a bottom-up approach. The
schematic illustrates the relationships among the resources and activities required
to support the production of, for example, Product Line A.
At the bottom of the schematic, you find the symbol for Demand A (DEMA)
which represents the total of all activities and resources required for the production
of Product Line A.
Follow the flow upwards, as detailed on the following table. The logic of the model
reflects the logic of OK Plastics’s operations. Activities and resources are involved
in the creation of products. As you move up through the schematic, you see how
the activities and resources draw from others in the organization.
Follow the Flow Upwards
Box Requires Box ID
Demand A (DEMA) Production Support PRSA
Sales & Administration SASA
Production Summary A Molding Processing MLDPRO
(PRSA) Raw Material: Product Line A MTLA
Setting up activities SETUP
Machinery Capital Charges MCAP
Sales & Administration Sales & Marketing SALMKT
(SASA) Order Processing ORDPRO
Advertising ADVT
Molding Process (MLDPRO) Machine Supplies SUPL
Molding Machine MLDMC
Energy ENERGY
Operator Choice OPERCH
Maintenance Mechanic MAINMCH
Setting up (SETUP) Maintenance Mechanics MAINMCH
Energy ENERGY
Molding Machine MLDMC
Operators (OPRL) Supervision SPVN
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41. Product Profitability Case Study
Follow the Flow Upwards (cont’d)
Box Requires Box ID
Mechanics (MAINMCH) Supervision SPVN
Order Processing (ORDPRO) Order Processing Department ORDDEPT
Molding Machines Building space OCCY
(MLDMC)
Sales & Marketing Sales & Marketing Department SALDEPT
(SALMKT)
The schematic can be used similarly to describe the activities and resources
required to support product lines B and C. 4
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42. Product Profitability Case Study
Step 4: Collecting Data and Rules
The team gathered the relevant operational and financial data needed to complete
the model.
Through a process of interviews with OK Plastics staff, the team gathered data on
the processes and activities. It is summarized in the following statements:
Report Content
OK Plastics Income An income statement for the current year
Statement
Operational and Detailed information about each product line
Financial Data
Costs of Services and Costs of internal and external variable supplies
Consumables
Resource Availability Resource availability and utilization for the current year
and Utilization
Variable Data A description of the variables used in the model
Financial Accounts A list of all revenue and cost categories used in the
model.
Fixed Resource Costs Resource financial, volume, and unit data
Occupancy Data Square footage use of building by resource
Note: Not all data items in the model are contained in the above tables.
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43. Product Profitability Case Study
OK Plastics Income Statement
Revenue
Sales of Product Line A $2,450
Sales of Product Line B 1,775
Sales of Product Line C 885
Total Revenue $5110
Cost of Sales
Raw Materials $1,865
Operators 690 4
Shared Production Costs
Maintenance Mechanics $60
Supervision 90
Machine Depreciation 390
Production Overhead 669
$3764
Gross Margin $1,346
Selling & Administration
Expenses
Sales & Marketing $190
Office Salaries 120
Rent & Insurance 270
Advertising 85
Computer Costs 73
Other Expenses 25
Total SG & A $763
Income Before Taxes $583
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44. Product Profitability Case Study
Operational and Financial Data
These spreadsheets contain detailed operational and financial data gathered by the
company for each member of the three product lines. Each product line consists of
several different products of varying units and resource requirements. A summary
of the data to be used for each of the product lines in the activity-based costing
model appears below:
Table 1: Product Analysis Detail for Product A
Sales Sales Material
Product Units Revenue Cost Operator Machine
Code (000) $(000) $(000) Hours Hours Set Ups Orders
A110 500 1181 499 8970 950 5 15
A120 200 498 210 3635 394 4 8
A130 120 304 131 2189 252 3 7
A140 80 204 92 1476 172 4 8
A150 50 129 59 950 115 5 6
A160 50 134 59 881 117 4 6
Total A 1000 2450 1050 18200 2000 25 50
Unit A 2.45 1.05 18.20 2.00 .025 .050
Table 2: Product Analysis Detail for Product B
Sales Sales Material
Product Units Revenue Cost Operator Machine
Code (000) $(000) $(000) Hours Hours Set Ups Orders
B201 100 331 112 3033 330 5 16
B202 70 242 79 2174 238 4 12
B203 50 174 57 1560 173 3 10
B204 50 175 58 1565 175 6 8
B205 40 142 46 1256 140 6 6
B206 40 144 46 1264 140 6 7
B207 30 110 35 948 108 7 8
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45. Product Profitability Case Study
Table 2: Product Analysis Detail for Product B (cont’d)
Sales Sales Material
Product Units Revenue Cost Operator Machine
Code (000) $(000) $(000) Hours Hours Set Ups Orders
B208 30 113 35 959 110 6 6
B209 25 94 30 806 93 6 6
B210 25 96 30 817 93 7 7
B211 20 77 24 699 76 7 7
B212 20 78 24 720 76 7 7
Total B 500 1775 575 15800 1750 70 100
4
Unit B 3.55 1.15 31.6 3.50 .140 .20
Table 3: Product Analysis Detail for Product C
Sales Sales Material
Product Units Revenue Cost Operator Machine
Code (000) $(000) $(000) Hours Hours Set Ups Orders
C301 23 122 35 938 104 5 18
C302 16 86 25 660 74 4 12
C303 12 68 19 501 56 3 15
C304 10 57 16 423 47 4 14
C305 8 47 13 342 38 6 13
C306 7 42 11 302 34 6 15
C307 7 42 11 302 34 5 16
C308 7 43 11 303 34 6 13
C309 6 36 10 259 29 6 14
C310 6 38 10 259 29 5 17
C311 6 38 10 259 29 5 15
C312 5 31 8 219 25 5 11
C313 5 32 8 221 25 4 12
C314 5 32 8 226 25 3 14
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46. Product Profitability Case Study
Table 3: Product Analysis Detail for Product C (cont’d)
Sales Sales Material
Product Units Revenue Cost Operator Machine
Code (000) $(000) $(000) Hours Hours Set Ups Orders
C315 5 32 8 229 25 4 12
C316 4 26 7 183 20 3 11
C317 4 26 7 183 20 6 8
C318 4 26 7 184 21 4 12
C319 3 19 5 138 16 6 10
C320 2 13 4 91 11 7 8
C321 1 6 2 47 5 6 6
C322 1 6 2 47 5 6 10
C323 1 6 2 48 6 7 7
C324 1 6 2 49 6 7 8
C325 1 5 2 49 6 7 9
Total C 150 885 240 6460 720 130 300
Unit C 5.90 1.60 43.07 4.80 0.867 2.0
Table 4: Product Analysis Detail for All Products
Sales Sales Material
Product Units Revenue Costs Operator Machine
Code (000) $(000) $(000) Hours Hours Set Ups Orders
Total 1650 5110 1865 40460 4470 225 450
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47. Product Profitability Case Study
Costs of Services and Consumables
The team also collected the following on internal and external costs:
Service Cost
Advertising $8.5 per advertisement
Computers $0.05 per order
Energy $0.0048 per megawatt hour (MWh)
Machine Supplies $0.025 per machine hour
Material C $1.60 per Product Line C piece
Material A $1.05 per Product Line A piece 4
Material B $1.15 per Product Line B piece
Resource Availability and Utilization
Max. Used Last
Resource Availability/Year Year Utilization%
Maintenance Mechanics 3200 hours 2876.3 90
Molding Machines 5928 hours 5595.25 94
Occupancy 100,000 sq. ft. 100,000 100
Operators 45,000 hours 40,460 89
Occupancy Data
Occupancy Square Feet
Molding Machines 60,000
Sales and Marketing 15,000
Order Processing 25,000
Total 100,000
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48. Product Profitability Case Study
Financial Accounts
Number Name Number Name
10 Revenue from Product A 600 Occupancy Costs
20 Revenue from Product B 610 Rent & Insurance
30 Revenue from Product C 700 Selling/Administration
Expense
100 Cost of Sales 710 Order Processing Salaries
101 Raw Materials 720 Sales/Marketing Salaries
102 Operators 725 Office Supplies Costs
500 Shared Production Costs 750 Computer Costs
510 Maintenance Mechanics 760 Advertising
520 Supervision 790 Other Expenses
550 Machine Depreciation
560 Machine Supplies
570 Energy
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49. Product Profitability Case Study
Fixed Resource Costs
The financial value is the user-assigned value, multiplied by the appropriate
variable.
Financial
Resource Financial Category Value Variable
Maintenance Maintenance Mechanics $30.00 #mnt
Mechanics Salaries
Molding Machines Machine Depreciation $130.00 #mch
Occupancy Rent and Insurance $675.00
Operators Operator Salaries $22.30 #opr 4
Order Processing Computer Costs $50.50
Order Processing Salaries $24.00 #ord
Other Expenses $5.00 #ord
Sales & Marketing Sales & Marketing Salaries $23.75 #sal
Supervision Supervisor Salaries $45.00 #spv
Variable Data
To make the model more flexible, some of the data collected is defined in the
model as variables. For another operator, you change the variable.
Variable Represents Value
efmc Machine efficiency rate 0.95
#mch Number of machines 3
#mnt Number of maintenance staff 2
#opr Number of operators 30
#ord Number of order processors 5
#sal Number of sales people 8
#sft Number of shifts 1
#spv Number of supervisors 2
Hyperion Business Modeling Solutions Guide s 49