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COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan Chapter 12 Activity-Based Management COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 1 Study Objectives 1. Describe how activity-based management and activity-based costing differ. 2. Define process value analysis. 3. Describe activity-based financial performance measurement. 4. Discuss the implementation issues associated with an activity-based management system. 5. Explain how activity-based management is a form of responsibility accounting, and tell how it differs from financial-based responsibility accounting. 2 The Relationship of Activity-Based Costing and Activity-Based Management • Activity-based management (ABM) is a – Systemwide, integrated approach – Focuses management’s attention on activities with the objectives of improving • Customer value • The profit achieved by providing this value • ABC is the major source of information for activity-based management. 3 The Relationship of ABC and ABM 4 Process Value Analysis • Process value analysis – Fundamental to activity-based responsibility accounting – Focuses on accountability for activities rather than costs – Emphasizes the maximization of systemwide performance instead of individual performance • Process value analysis is concerned with: – Driver analysis – Activity analysis – Performance measurement 5 Process Value Analysis • Driver analysis is the effort expended to identify the factors that are the root causes of activity costs. • Activity analysis is the process of identifying, describing, and evaluating the activities an organization performs. • Activity analysis should produce four outcomes: – What activities are performed. – How many people perform the activities. – The time and resources are required to perform the activities. – An assessment of the value of the activities to the organization. 6 Process Value Analysis • Value-added activities – Necessary to remain in business – By mandate (e.g., comply with SEC reporting requirements) – May contain nonessential actions that create unnecessary cost. • Nonvalue-added activities – All activities other than those essential to remain in business 7 Process Value Analysis • Nonvalue-added activities – Scheduling • Uses resources to determine access to processes – Moving • Uses resources to move inventory among departments – Waiting • Uses resources while waiting for next process – Inspecting • Uses resources to ensure conformance to standards – Storing • Uses resources while goods are held in inventory 8 Process Value Analysis • Kaizen costing: constant incremental improvement, including cost reduction through activity management – Activity elimination • Focus on eliminating nonvalue-added activities – Activity selection • Choose among sets of competing strategies – Activity reduction • Decrease time and resources required by an activity – Activity sharing • Use economies of scale to increase efficiency 9 Process Value Analysis • Assessing activity performance – Financial measures – Nonfinancial measures • Dimensions of performance assessment – Efficiency – Quality – Time 10 Financial Measures of Activity Efficiency • Reveal the current level of efficiency and the potential for increased efficiency – Value- and nonvalue-added activity costs – Trends in activity costs – Kaizen standard setting – Benchmarking – Activity flexible budgeting – Activity capacity management 11 Financial Measures of Activity Efficiency 12 Financial Measures of Activity Efficiency Activity Purchasing Molding Inspecting Grinding Activity Driver SQ Purchasing hours 20,000 Molding hours 30,000 Inspection hours 0 Number of units 0 AQ 23,000 34,000 6,000 5,000 SP $20 12 15 6 Value-added standards call for elimination 13 Financial Measures of Activity Efficiency 14 Financial Measures of Activity Efficiency 15 Financial Measures of Activity Efficiency • Kaizen costing is concerned with reducing the costs of existing products and processes – Controlling this cost reduction process is accomplished through the repetitive use of two major subcycles • Kaizen (continuous improvement) cycle • Maintenance cycle 16 Financial Measures of Activity Efficiency 17 Financial Measures of Activity Efficiency • Benchmarking – Uses best practices as the standard for evaluating activity performance • Internal benchmarking – Benchmarking against the best internal performance • External benchmarking – Comparison with others outside the organization 18 Financial Measures of Activity Efficiency • Activity flexible budgeting – Predicted activity costs reflect activity output changes – Multiple cost drivers require multiple flexible budget formulas – Describe both flexible and committed resources 19 Financial Measures of Activity Efficiency 20 Financial Measures of Activity Efficiency 21 Financial Measures of Activity Efficiency 22 Financial Measures of Activity Efficiency 23 Financial Measures of Activity Efficiency Budgeted Cost Activity Actual Cost 25 Setups Level Inspection: Fixed Variable Total $ 82,000 43,500 $ 125,500 $ 80,000 52,500 $ 132,500 Variance $ 2,000 U 9,000 F $ 7,000 F 24 Financial Measures Of Activity Efficiency • Activity capacity – The number of times an activity can be performed • Activity capacity management – Measured by activity drivers – Capacity variances • Activity volume variance • Unused capacity variance 25 Financial Measures of Activity Efficiency 26 Implementing ABM (continued on next slide) 27 Implementing ABM (continued from previous slide) 28 Implementing ABM 1. 2. 3. 4. 5. Systems planning provides the justification for implementing ABM and address the following issues: The purpose and objectives of the ABM system. The organization’s current and desired competitive position. The organization’s business processes and product mix. The timeline, assigned responsibilities, and resources required for implementation. The ability of the organization to implement, learn, and use new information. 29 Implementing ABM • Why ABM implementations fail – Lack of support of higher-level management. – Failure to maintain support from higher-level management. – Resistance to change. – Failure to integrate the new system. 30 Financial-Based vs Activity-Based Responsibility Accounting 31 Financial-Based vs Activity-Based Responsibility Accounting • Assigning responsibility – Financial-based • Focuses on functional organizational units and individuals • Emphasis on optimum results at the local level – Activity-based • Focuses on processes and teams • Emphasis on systemwide optimization 32 Financial-Based vs Activity-Based Responsibility Accounting 33 Financial-Based vs Activity-Based Responsibility Accounting • Establishing performance measures – Financial-based • Budgeting and standard costing • Measures are objective and financial; stable over time – Activity-based • Measures are process-orientated; structured to support change 34 Financial-Based vs Activity-Based Responsibility Accounting 35 Financial-Based vs Activity-Based Responsibility Accounting • Evaluating performance – Financial-based • Compare actual outcomes with budgeted outcomes – Activity-based • Financial perspective • Other critical dimensions: time, quality, efficiency 36 Financial-Based vs Activity-Based Responsibility Accounting 37 Financial-Based vs Activity-Based Responsibility Accounting • Assigning rewards – Both systems • Management policy and discretion – Financial-based • Individual achieves or beats budget standards • Profit-sharing (individual) – Activity-based • Multidimensional measurement and reward • Gainsharing (group-based) 38 Financial-Based vs Activity-Based Responsibility Accounting 39 COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan End Chapter 12 COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 40