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PowerPoint Presentation by

Gail B. Wright�Professor Emeritus of Accounting�Bryant University

© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.�

MANAGEMENT ACCOUNTING

8^th EDITION

BY

HANSEN & MOWEN

5 ACTIVITY-BASED MANAGEMENT

LEARNING OBJECTIVES

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LEARNING GOALS

After studying this chapter, you should be able to:

LEARNING OBJECTIVES

1. Describe activity-based management & explain its relationship to activity-based costing.
2. Explain process value analysis.
3. Describe activity performance measurement.
4. Describe activity-based customer & supplier costing

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Click the button to skip Questions to Think About

QUESTIONS TO THINK ABOUT:�Roberts Truck Products (RTP)

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Why is accurate cost information about customers & suppliers important?

What is wrong with the claim that all customers are good customers?

QUESTIONS TO THINK ABOUT:� Roberts Truck Products (RTP)

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Will accurate cost information guarantee that a firm is competitive?

QUESTIONS TO THINK ABOUT: � Roberts Truck Products (RTP)

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How can managing activities increase efficiency?

How can we determine whether activities are of value to a firm?

QUESTIONS TO THINK ABOUT: � Roberts Truck Products (RTP)

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What role, if any, do cost reports play in managing activities?

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Describe activity-based management & explain its relationship to activity-based costing.

LEARNING OBJECTIVE

ACTIVITY-BASED MANAGEMENT: Definition

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A systemwide, integrated approach that focuses management’s attention on activities for improving customer value and profit.

LO 1

2-DIMENSIONAL ABM MODEL

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EXHIBIT 5-1

LO 1

2-dimensional model shows intersection of cost & process.

ABM MODEL: Cost Dimension

• Information about resources, activities, cost objects such as
• Useful for products, customers, suppliers, distribution channels
• Objective: improving accuracy of cost assignments

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LO 1

ABM MODEL: Process Dimension

• Information about
• What activities are performed
• Why activities are performed
• How well they are performed
• Objective: cost reduction
• Provides ability to engage in & measure continuous improvement

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LO 1

ABM & ABC

• ABM incorporates & extends ABC
• ABM objectives
• Inproving decision making with accurate cost information
• Reducing costs by encouraging, supporting continuous improvements efforts

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LO 1

ABM IMPLEMENTATION MODEL

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EXHIBIT 5-2

LO 1

SYSTEMS PLANNING

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• Addresses these issues
• Purpose, objectives of ABM system
• Organizations current & desired competitive position
• Organization’s business processes & product mix
• Timeline, assigned responsibilities, resources required for implementation
• Ability of organization to implement, learn, use new information

LO 1

ACTIVITY IDENTIFICATION, DEFINITION, CLASSIFICATION

• Knowing tasks that define activity helps improve efficiency
• Classifying activities allows ABM to connect with other continuous improvement initiatives
• JIT manufacturing
• TQM
• Total environmental quality cost management

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LO 1

WHY DOES ABM FAIL?

• Implementation failure due to
• Lack of support from higher level management
• Results that do not occur as expected
• Significant investment in education, training not made
• Resistance to change
• Failure to integrate new system

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LO 1

ABM & RESPONSIBILITY ACCOUNTING

• Responsibility accounting is fundamental tool of managerial accounting control
• Also related to process value analysis (PVA)
• Assigning responsibility
• Establishing performance measures, benchmarks
• Evaluating performance
• Assigning rewards

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LO 1

RESPONSIBILITY ACCOUNTING SYSTEM

• 3 ways to assign responsibility and measure performance
• Financial (functional)-based system
• Activity-based system
• Strategic-based system (Ch. 16)

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LO 1

FINANCIAL-BASED SYSTEMS

• Assigns responsibilities, measures performance in financial terms
• Useful in environments with slow or little change
• Concrete pipes, blocks
• Well- defined or relatively stable environments

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LO 1

ACTIVITY-BASED SYSTEMS

• Developed for firms in continuous improvement environment
• Assigns responsibilities to processes
• Uses both financial & nonfinancial measures of performance
• Useful in environment that experience rapid change
• Computer technology

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LO 1

COMPARING SYSTEMS:�Assigning Responsibilities

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LO 1

EXHIBIT 5-4

Assignment based on function

Assignment emphasizes improvement

COMPARING SYSTEMS:�Measuring Performance

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LO 1

EXHIBIT 5-5

Financial performance measures

Process improvement measures

COMPARING SYSTEMS:�Evaluating Performance

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LO 1

EXHIBIT 5-6

Meet/beat financial standard

Evaluates time, quality, efficiency & financial standards

GAINSHARING: Definition

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ABM system allows employees to share in gains related to specific improvement projects.

LO 1

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Explain process value analysis.

LEARNING OBJECTIVE

PROCESS VALUE ANALYSIS: Definition

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PVA emphasizes accountability for activities rather than costs; focuses on systemwide performance.

LO 2

PROCESS VALUE ANALYSIS: Definition

PVA CONCERNS

• Driver analysis
• Activity analysis
• Activity performance measurement

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LO 2

DRIVER ANALYSIS: Definition

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Understanding what causes activity costs by understanding activity inputs & outputs; most basic causes for an activity being performed.

LO 2

ROOT CAUSES: Definition

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Why are “root causes” so important?

Because the root cause of 1 activity may be root cause of related activities.

LO 2

ACTIVITY ANALYSIS: Definition

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The process of identifying, describing, evaluating the activities an organization performs.

LO 2

ACTIVITY ANALYSIS OUTCOMES

• What activities are done
• How many people perform the activities
• Time, resources required to perform activities
• Assessing value of activities to organization
• Activities can be classified as
• Value-added
• Non-value-added

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LO 2

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What are “value-added” activities?

Value-added activities are activities that are necessary to remain in business.

LO 2

VALUE-ADDED ACTIVITIES

• Are
• Mandatory to comply with laws
• Discretionary
• Produces a change of state
• Not achievable by preceding activities
• Enables other activities to be performed
• Performed at a value-added cost to achieve perfect efficiency
• Eliminate waste & reduce costs

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LO 2

NON-VALUE-ADDED ACTIVITIES

• Are unnecessary
• Fail to satisfy 3 defining conditions of value-added activities
• Incur non-value-added costs of inefficiency

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LO 2

NON-VALUE-ADDED ACTIVITIES: Examples

• Scheduling
• Moving
• Waiting
• Inspecting
• Storing

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LO 2

Challenge of activity analysis: produce goods without using non-value-added activities.

KAIZEN COSTING: Definition

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The effort to reduce costs of existing products & processes.

LO 2

REDUCING COSTS

• Activity elimination
• Focusing on non-value-added activities
• Activity selection
• Choosing among different sets of activities
• Activity reduction
• Reducing time, resources required
• Activity sharing
• Using economies of scale

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LO 2

ACTIVITY PERFORMANCE MEASUREMENT: Definition

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Assessing how well an activity was performed and results achieved using both financial & nonfinancial measures.

LO 2

ACTIVITY PERFORMANCE MEASURES

• Efficiency
• Relationship of activity inputs & outputs
• Quality
• Doing it right the first time
• Time
• Shortening activity time

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LO 2

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Describe activity performance measurement.

LEARNING OBJECTIVE

FINANCIAL MEASURES OF ACTIVITY PERFORMANCE

• For potential & actual savings
• Value- & non-value-added activity cost reports
• Trends in activity cost reports
• Kaizen standard setting
• Benchmarking
• Life-cycle costing

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LO 3

VALUE-ADDED STANDARD

• Calls for elimination of non-value-added activities
• Identifies optimal activity output
• Compares actual to value-added activity costs allowing management to
• Assess level of activity inefficiency
• Determine potential for improvement

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LO 3

FORMULAS

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SQ: value-added output level

SP: standard price per output measure

AQ: actual quantity used of flexible resources

LO 3

Value-added = SQ x SP

Non-value-added costs = (AQ – SQ)SP

EXHIBIT 5-8

COST REPORT: Step 1

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LO 3

NON-VALUE-ADDED ACTIVITIES: Examples

• Scheduling
• Moving
• Waiting
• Inspecting
• Storing

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LO 2

REMINDER

COST REPORT: Step 2

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LO 3

EXHIBIT 5-9

COST REPORT: Step 2

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LO 3

EXHIBIT 5-9

Cost report emphasizes the opportunity for improvement.

TREND REPORTING

Allows management to follow up on actions taken to reduce costs by examining whether outcomes were as expected.

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LO 3

TREND REPORT: Step 3

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LO 3

EXHIBIT 5-10

Trend report shows improvement that has been made.

Non-Value-Added Costs

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What is kaizen costing?

Kaizen costing helps reduce costs by repeated use of 2 subcycles: 1) continuous improvement, and 2) maintenance.

LO 3

BENCHMARKING: Definition

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LO 3

Uses “best practices” as the standard for evaluating activity performance with the goal of becoming the best at performing activities & processes.

ACTIVITY CAPACITY : Definition

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LO 3

Activity drivers measure activity capacity, that is the number of times an activity can be performed.

CAPACITY VARIANCES

Unused capacity, the difference between activity availability & activity usage, needs management attention to reduce costs.

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LO 3

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Describe activity-based customer & supplier costing.

LEARNING OBJECTIVE

ACTIVITY-BASED CUSTOMER & SUPPLIER COSTING

By applying the approach of activity-based costing to customers and suppliers, managers can identify & reduce true cost of these relationships.

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LO 4

ACTIVITY-BASED CUSTOMER COSTING: An Example

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ABC costing shows comparative cost of larger & smaller customers, assuming same number of units sold.

LO 4

ACTIVITY-BASED SUPPLIER COSTING

• Identifies costs other than price such as
• Quality
• Reliability
• Delivery timeliness

for management to consider when selecting suppliers

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LO 4

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THE END

CHAPTER 5