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PowerPointPowerPoint Presentation by Presentation by
Gail B. WrightGail B. WrightProfessor Emeritus of AccountingProfessor Emeritus of AccountingBryant UniversityBryant 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
8th EDITION
BY
HANSEN & MOWEN
5 ACTIVITY-BASED MANAGEMENT
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LEARNING GOALS
After studying this chapter, you should be able to:
LEARNING OBJECTIVES
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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
LEARNING OBJECTIVES
Click the button to skip Questions to Think About
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QUESTIONS TO THINK ABOUT:Roberts Truck Products (RTP)
Why is accurate cost information about customers & suppliers
important?
What is wrong with the claim that all customers are good customers?
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QUESTIONS TO THINK ABOUT: Roberts Truck Products (RTP)
Will accurate cost information guarantee that a firm is
competitive?
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QUESTIONS TO THINK ABOUT: Roberts Truck Products (RTP)
How can managing activities increase efficiency?
How can we determine whether activities are of value to a firm?
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QUESTIONS TO THINK ABOUT: Roberts Truck Products (RTP)
What role, if any, do cost reports play in managing
activities?
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1Describe activity-based management & explain its relationship to activity-based costing.
LEARNING OBJECTIVE
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ACTIVITY-BASED MANAGEMENT: Definition
A systemwide, integrated approach that focuses
management’s attention on activities for improving customer
value and profit.
LO 1
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2-DIMENSIONAL ABM MODEL
EXHIBITEXHIBIT 5-15-1
LO 1
2-dimensional model shows
intersection of cost & process.
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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
LO 1
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ABM MODEL: Process Dimension
Information about What activities are performedWhy activities are performedHow well they are performed
Objective: cost reductionProvides ability to engage in & measure
continuous improvement
LO 1
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ABM & ABCABM incorporates & extends ABCABM objectives
Inproving decision making with accurate cost information
Reducing costs by encouraging, supporting continuous improvements efforts
LO 1
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ABM IMPLEMENTATION MODEL
EXH
IBIT
EXH
IBIT
5-25-2
LO 1
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SYSTEMS PLANNINGAddresses these issues
Purpose, objectives of ABM systemOrganizations current & desired competitive
positionOrganization’s business processes & product mixTimeline, assigned responsibilities, resources
required for implementationAbility of organization to implement, learn, use
new information
LO 1
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ACTIVITY IDENTIFICATION, DEFINITION, CLASSIFICATIONKnowing tasks that define activity helps
improve efficiencyClassifying activities allows ABM to connect
with other continuous improvement initiativesJIT manufacturingTQMTotal environmental quality cost management
LO 1
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WHY DOES ABM FAIL?Implementation failure due to
Lack of support from higher level managementResults that do not occur as expectedSignificant investment in education, training not
madeResistance to changeFailure to integrate new system
LO 1
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ABM & RESPONSIBILITY ACCOUNTING
Responsibility accounting is fundamental tool of managerial accounting control
Also related to process value analysis (PVA)Assigning responsibilityEstablishing performance measures, benchmarksEvaluating performanceAssigning rewards
LO 1
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RESPONSIBILITY ACCOUNTING SYSTEM
3 ways to assign responsibility and measure performanceFinancial (functional)-based systemActivity-based systemStrategic-based system (Ch. 16)
LO 1
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FINANCIAL-BASED SYSTEMSAssigns responsibilities, measures
performance in financial termsUseful in environments with slow or little
changeConcrete pipes, blocks
Well- defined or relatively stable environments
LO 1
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ACTIVITY-BASED SYSTEMSDeveloped for firms in continuous
improvement environmentAssigns responsibilities to processesUses both financial & nonfinancial measures
of performanceUseful in environment that experience rapid
changeComputer technology
LO 1
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COMPARING SYSTEMS:Assigning Responsibilities
LO 1
EXHIBITEXHIBIT 5-45-4
Assignment based on function
Assignment emphasizes improvement
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COMPARING SYSTEMS:Measuring Performance
LO 1
EXHIBITEXHIBIT 5-55-5
Financial performance measures
Process improvement measures
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COMPARING SYSTEMS:Evaluating Performance
LO 1
EXHIBITEXHIBIT 5-65-6Meet/beat financial standard
Evaluates time, quality, efficiency & financial standards
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GAINSHARING: Definition
ABM system allows employees to share in gains related to specific
improvement projects.
LO 1
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2 Explain process value analysis.
LEARNING OBJECTIVE
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PROCESS VALUE ANALYSIS: Definition
PVA emphasizes accountability for activities rather than costs;
focuses on systemwide performance.
LO 2
PROCESS VALUE ANALYSIS: Definition
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PVA CONCERNS
Driver analysisActivity analysisActivity performance measurement
LO 2
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DRIVER ANALYSIS: Definition
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
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ACTIVITY ANALYSIS: Definition
The process of identifying, describing, evaluating the activities an organization
performs.
LO 2
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ACTIVITY ANALYSIS OUTCOMESWhat activities are doneHow many people perform the activitiesTime, resources required to perform
activitiesAssessing value of activities to
organizationActivities can be classified as
Value-addedNon-value-added
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
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VALUE-ADDED ACTIVITIESAre
Mandatory to comply with lawsDiscretionary
Produces a change of stateNot achievable by preceding activitiesEnables other activities to be performed
Performed at a value-added cost to achieve perfect efficiency
Eliminate waste & reduce costs
LO 2
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NON-VALUE-ADDED ACTIVITIES
Are unnecessaryFail to satisfy 3 defining conditions of
value-added activitiesIncur non-value-added costs of
inefficiency
LO 2
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NON-VALUE-ADDED ACTIVITIES: Examples
SchedulingMovingWaitingInspectingStoring
LO 2
Challenge of activity analysis: produce goods without using non-value-added activities.
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KAIZEN COSTING: Definition
The effort to reduce costs of existing products & processes.
LO 2
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REDUCING COSTSActivity elimination
Focusing on non-value-added activitiesActivity selection
Choosing among different sets of activitiesActivity reduction
Reducing time, resources requiredActivity sharing
Using economies of scale
LO 2
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ACTIVITY PERFORMANCE MEASUREMENT: Definition
Assessing how well an activity was performed and results
achieved using both financial & nonfinancial measures.
LO 2
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ACTIVITY PERFORMANCE MEASURES
EfficiencyRelationship of activity inputs & outputs
QualityDoing it right the first time
TimeShortening activity time
LO 2
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3 Describe activity performance measurement.
LEARNING OBJECTIVE
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FINANCIAL MEASURES OF ACTIVITY PERFORMANCE
For potential & actual savingsValue- & non-value-added activity cost reportsTrends in activity cost reportsKaizen standard settingBenchmarkingLife-cycle costing
LO 3
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VALUE-ADDED STANDARD
Calls for elimination of non-value-added activities
Identifies optimal activity outputCompares actual to value-added activity costs
allowing management toAssess level of activity inefficiencyDetermine potential for improvement
LO 3
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FORMULAS
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
EXHIBITEXHIBIT 5-85-8
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COST REPORT: Step 1
Activity Activity Driver SQ* AQ* SP*Welding Welding hours 10,000 12,000 $40
Rework Rework hours 0 10,000 9
Setups Setup hours 0 6,000 60
Inspection # Inspections 0 4,000 15
LO 3
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COST REPORT: Step 2
ActivityValue-
Added CostsNon-Value-Added Costs
Actual Costs
Welding $400,000 $80,000 $480,000
Rework 0 90,000 90,000
Setups 0 360,000 360,000
Inspection 0 60,000 60,000
Total $ 400,000 $ 590,000 $ 990,000
LO 3
EXHIBITEXHIBIT 5-95-9
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COST REPORT: Step 2
ActivityValue-Added
Non-Value-Added
Actual Costs
Welding $400,000 $80,000 $480,000
Rework 0 90,000 90,000
Setups 0 360,000 360,000
Inspection 0 60,000 60,000
Total $ 400,000 $ 590,000 $ 990,000
LO 3
EXHIBITEXHIBIT 5-95-9
Cost report emphasizes the opportunity for improvement.
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TREND REPORTING
Allows management to follow up on actions taken to reduce costs by examining whether outcomes were as expected.
LO 3
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TREND REPORT: Step 3
ActivityLast 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
LO 3
EXHIBITEXHIBIT 5-105-10
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
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BENCHMARKING: Definition
LO 3
Uses “best practices” as the standard for evaluating activity performance with the goal of
becoming the best at performing activities & processes.
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ACTIVITY CAPACITY : Definition
LO 3
Activity drivers measure activity capacity, that is the
number of times an activity can be performed.
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CAPACITY VARIANCES
Unused capacity, the difference between activity availability & activity usage, needs management attention to reduce costs.
LO 3
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4 Describe activity-based customer & supplier costing.
LEARNING OBJECTIVE
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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.
LO 4
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ACTIVITY-BASED CUSTOMER COSTING: An Example
Large Customer
10 Smaller Customers
Order-filling costs $ 4,000 $ 400,000
Sales force costs 10,000 210,000
ABC costing shows comparative cost of larger & smaller customers, assuming same number of units sold.
LO 4
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ACTIVITY-BASED SUPPLIER COSTING
Identifies costs other than price such asQualityReliabilityDelivery timeliness
for management to consider when selecting suppliers
LO 4
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THE END
CHAPTER 5