Accounting Based Management

8/6/2019 Accounting Based Management

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GROUP 12


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LongLong--termterm

contracts withcontracts withsuppliers.suppliers.

Onlya fewOnlya fewsuppliers.suppliers.

Parts deliveredParts deliveredinsmalllots.insmalllots.

MinimalMinimalinspectionofinspectionof

materials.materials.

GroupedGrouped

paymentstopaymentstovendor.vendor.


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Activity-Based Management

Theuseofactivityanalysistohelp

managementmake decisions


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Activity-Based ManagementActivity-based costing establishes relationships

between overhead costs and activities so thatwe can better allocate overhead costs.

Activity-based management focuseson managing activities to reduce costs.


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BACKGROUND

CUSTOMER

COMPLEX & SHARP

COMPETITION

INFORMATION

TECHNOLOGY

PARADIGM TOWARDSORGANIZATION

MANAGEMENT

APPROACH

ACTIVITY-BASEDMANAGEMENT

ORGANIZATION AS

A POOL OF SHAREDCOMPETENCIES AND

RESOURCES

BUSINESS

ENVIRONMENT

CHARACTERISTICS


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DEFINITION OF ABM

RESOURCESACTIVITY

INPUT PROCESS OUTPUTUSAGE

PROCCESSCUSTOMER

PRODUCTS

& SERVICES

CUSTOMER

VALUE

CUSTOMER

SATISFACTION


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DEFINITION


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Themethod used tomanagebusinessprocesswill bea

major factor in determiningthesurvivalofcorporation inthecoming decade

(Noland D. Archibald)


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Activity-Based Management

ABM describesmanagement decisionsthatuse

activity-based costing informationtosatisfycustomersand improveprofits.

Productpricingand mix decisions

Costreductionand process improvement decisions

Design decisions


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Product Pricing and

Mix Decisions

ABCgivesmanagement insight intothecost

structures formakingand selling diverseproducts.

Itprovidesmoreaccurateproductcostinformationand more detailed information

oncosts

o

fact

ivities

an

dthe

driv

erso

fthose

costs

.


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Cost Reduction and Process

Improvement Decisions

Manufacturingand distributionpersonneluse

ABCsystemsto focusoncost-reductionefforts.Managerssetcost-reductiontargets intermsof

reducingthecostperunitofthecost-allocation base.


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Design Decisions

Managementcan identifyand evaluatenew designs

to improveperformance byevaluatinghow productand process designsaffectactivitiesand costs.

Companiescan work withtheircustomerstoevaluatethecostsand pricesofalternative designs.


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Two-Dimensional ABC and Activity-Based

Management

ActivityActivity

TriggersTriggers

Cost ObjectsCost Objects

ActivitiesActivities

RootRoot

CausesCauses

Pr c ss ViPr c ss Victi it l siscti it l sis

Resource costsResource costs

C st ssi t ViC st ssi t Vi

PerformancePerformance

MeasuresMeasures

cti it E l ticti it E l ti


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Two-Dimensional ABC and Activity-Based

Management

Resource costsResource costs

RootRoot

CausesCauses

ActivityActivity

TriggersTriggers

PerformancePerformance

MeasuresMeasures

Cost ObjectsCost Objects


C st ssi t ViC st ssi t Vi

ssi r s rcc sts t cti it

c st ls.

ssi cti itc sts t c st

j cts sic st ri rs.


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Process value analysis is fundamental toactivity-based responsibility accounting,focuses on accountability for activities

rather than costs, and emphasizes themaximization of system-wide performanceinstead of individual performance.

ProcessProcess Value AnalysisValue Analysis

Process value analysis is concerned with:Driver analysis

Activity analysis

Activity performance measurement


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IDENTIFYING ACTIVITY DRIVER

y Activity driver is a measure of frequency and intensity of costobject demands on an activity, used in assigning activity costs tocost objects.

y Example:

y number of labor transactionsy number of material moves

y number of part numbers

y number of part received

y number of product

y average number of optiony number of schedule changes

y number of vendors

y number of units scraped

y number of engineering change notice

y number of units reworks


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Activity AnalysisActivity AnalysisActivity analysis istheprocessof identifying, describing,

and evaluatingtheactivitiesanorganizationperforms.

Activity analysis should produce fouroutcomes:

Whatactivitiesare done.

How manypeopleperformtheactivities.

Thetimeand resourcesarerequired toperformtheactivities.

Anassessmentofthe valueoftheactivitiestotheorganization.


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ACTIVITY PERFORMANCE MEASURES

y

Effici cy Relationshipofactivityinputs & outputs

y Qualit

y Doing itrightthe firsttime

y Tiy Shorteningactivitytime


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Eliminatio

nof

No

n-Value-Added Co

sts

Anal sis andAnal sis andClassificati nClassificati n

ValueValue--

addedaddedActi itiesActi ities

N nvalueN nvalue--

addedaddedActivitiesActivities


Reduce rReduce rEli inateEli inate

C ntinuall EvaluateC ntinuall Evaluateand I r veand I r ve


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Achieving Cost Reduction

ActivitActivitReducti nReducti n

ActivitActivitEli inati nEli inati n

ActivitSelecti n

ActivitS aring

ReduceReduce

NonNon--ValueValue--AddedAdded

CostsCosts


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Value- vs. non-value-added

Would thecustomer willinglypayforthecostoftheactivity?

Would thecustomerencourage doingmoreoftheactivity?

Doestheactivityhelptheorganizationreach itsgoals?


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Anactivity isclassified as value-added provided it

simultaneouslysatisfiesthreeconditions:

ValueValue--

AddedAddedActivitiesActivities

The activity produces a change of state.

The change of state was not achievable by preceding activities.

The activity enables other activities to be performed.


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VALUE-ADDED ACTIVITY

VALUE-

ADDED

ACTIVITY?

NEXT

ACTIVITY ORCUSTOMER

PREVIOUSACTIVITY

Meaningful change,

both for previous

process and next

process

Change cannot be

done by previousprocess

Enable other

activities to be

done


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Classification ofValue-Added

ActivitiesyReal value added activity (RVA):

activitiesthatmayadd valuetotheproduct

incustomerspointof view.yBusiness value added activity (BVA):

activitiesthat increase value forthebusiness butnot fortheconsumer.

Example:customercreditrating.yNon value added activity(NVA):

activitiesthat dontadd value for bothcustomerand business


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All activities other than those

essential to remain in businessare referred to as non value-

added activities.

NonvalueNonvalue--

AddedAddedActivitiesActivities


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Value-added vs. non-value-added activities

Activity

Materialhandling

Set-upAssembly

Testingand inspection

Rework

PackagingBreaksand meetings

Value-added?

No

NoYes

Maybe

No

MaybeNo


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FINANCIAL MEASURES OF ACTIVITY

PERFORMANCE

y Forpotential & actualsavings

y Value- & non-value-added activitycostreportsy Trends inactivitycostreports

y Kaizenstandard setting

y Benchmarking

y Life-cyclecosting


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COST REPORT: Step 1Activity Activity Driver SQ* AQ* SP*

W

eldingW

elding hours 10,000 12,000 $40Rework Rework hours 0 10,000 9

Setups Setup hours 0 6,000 60

Inspection # Inspections 0 4,000 15


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COST REPORT: Step 2

Activity

Value-

Added Costs

Non-Value-

Added Costs

Actual

Costs

Welding $400,000 $80,000 $480,000Rework 0 90,000 90,000

Setups 0 360,000 360,000

Inspection 0 60,000 60,000

Total $ 400,000 $ 590,000 $ 990,000


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TREND REPORTING

Allowsmanagementto follow uponactionstakentoreducecosts byexamining whetheroutcomes wereasexpected.


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T

RE

ND RE

PORT

:Step 3

Activity

Last

Year

Current

Year Change

Welding $80,000 $50,000 $30,000

Rework 90,000 70,000 20,000

Setups 360,000 200,000 160,000

Inspection 60,000 35,000 25,000

Total $ 590,000 $ 355,000 $ 235,000

Trend report

shows

improvement that

has been made.

Non-Value-Added Costs


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Kaizen costing isconcernedwithreducingthecostsofexistingproductsand processes.

Controlling this cost reduction processis accomplished through the repetitiveuse of two major sub-cycles:

(1) the Kaizen or continuousimprovement cycle, and

the maintenance cycle.

KAIZE

NCOST

ING


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Kaizen CostingTheprocessofcostreduction duringthe

manufacturingphaseofanexistingproduct.

3/31/0x 3/31/0x

.

.CurrentyearCurrentyearcost base.cost base.Cost base forCost base fornextyear.nextyear.

Product cost


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Kaizen CostingTheprocessofcostreduction duringthe

manufacturingphaseofanexistingproduct.

3/31/0x 3/31/0x

.

.Product cost

}Kaizen goalKaizen goal

costcost--reductionreduction

amount.amount.


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BENCHMARKING:Definition

Uses best practices as the

standard for evaluating activity

performance with the goal of

becoming the best at performingactivities & processes.


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BenchmarkingThecontinualsearch

forthemost

effectivemethod ofaccomplishingatask, bycomparingexistingmethodsand performance

levels withthoseofother

organizations.

Here areHere are

the bestthe bestpracticespractices

in ourin our

industry. . .industry. . .


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L

ife-Cycle

Cost

Bu

dget

ing

Planning Design Testing Pr ducti n L gistics

100

90

80

70

60

50

4030

20

10

C st C it ent CurveLife C cle

C st %

90 ercent f life-c clec stsare c ittedatt is int


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Keys to Successfully Implementing ABC and

ABM

1. OrganizationalCulture.1. OrganizationalCulture.

2. To2. To -- anage entCo it ent.anage entCo it ent.

3.ChangeCha ion.3.ChangeCha ion.

4.Change Process.4.Change Process.

5.ContinuingEducation.5.ContinuingEducation.

Accounting Based Management

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