PPT 14 -1

ADVANCED MANAGEMENT ACCOUNTING

PPT 14 -2

Activity Based Management

PPT 14 -3

Activity-Based Management (ABM)

Activity-based management (ABM) is a systemwide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the profit achieved by providing this value.

Activity-based management encompasses both product costing and process value analysis.

PPT 14 -4

Cost Dimension

Process Dimension

Driver Analysis Activities Performance Measures

Resources

Products andCustomers

Why? What? How Well?

Activity-Based Management Model

PPT 14 -5

Process Value Analysis

Process value analysis is fundamental to activity-based responsibility accounting, focuses on accountability for activities rather than costs, and emphasizes the maximization of systemwide performance instead of individual performance.

Process value analysis is concerned with:

Driver analysis

Activity analysis

Performance measurement

PPT 14 -6

Activity Analysis

Activity analysis should produce four outcomes:

What activities are performed?

How many people perform the activities?

The time and resources required to perform the activities.

An assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value.

PPT 14 -7

Value-Added Activities

A discretionary activity is classified as value-added provided it simultaneously satisfies three conditions:

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.

PPT 14 -8

Nonvalue-Added Activities

Nonvalue-Added Activities are activities that add cost and impede

performance.

Scheduling

Moving

Waiting

Inspecting

Storing

Examples

PPT 14 -9

Activity Analysis

Activity elimination

Activity selection

Activity reduction

Activity sharing

Activity Analysis Can Reduce Costs in Four Ways:

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Activity Performance Measurement

Efficiency

Quality

Time

Three Dimensions of Activity Performance

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Measures of Activity Performance

Financial measures of activity efficiency include:

Value and nonvalue-added activity cost reports

Trends in activity cost reports

Kaizen standard setting

Benchmarking

PPT 14 -12

Value- and Nonvalue-Added Cost Reporting

Consider the following data:

Activity Activity Driver SQ AQ SP

Welding Welding hours 10,000 8,000 $40

Rework Rework hours 0 10,000 9

Setups Setup hours 0 6,000 60

Inspection # of inspections 0 4,000 15

PPT 14 -13

Value- Nonvalue-

Activity Added Costs Added Costs Actual Costs

Welding $400,000 $ 80,000 $480,000

Rework ---- 90,000 90,000

Setups ---- 360,000 360,000

Inspection ---- 60,000 60,000

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

======== ======== ========

Value- and Nonvalue-AddedCost Report (continued)

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Nonvalue-Added Costs

Activity 2000 2001 Change

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

Rework 360,000 200,000 160,000

Setups 90,000 70,000 20,000

Inspections 60,000 35,000 25,000

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

======== ======== ========

Trend Report: Nonvalue-Added Costs

PPT 14 -15

The Role of Kaizen Standards

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:

(1) the kaizen or continuous improvement cycle, and

(2) the maintenance cycle.

PPT 14 -16

Improving Performance ThroughBenchmarking

Organization A Organization BCost of Processing a

Purchase Order is

$20

Cost of Processing a

Purchase Order is

$15

Share

Information

How do we improve?

PPT 14 -17

Activity-Based Budgeting

Activity flexible budgeting is the

prediction of what activity costs will be as activity output changes.

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Flexible Budget: Direct Labor Hours

Cost Formula Direct Labor Hours

Fixed Variable 10,000 20,000

Direct materials --- $10 $100,000 $200,000

Direct labor --- 8 80,000 160,000

Maintenance $ 20,000 3 50,000 80,000

Machining 15,000 1 25,000 35,000

Inspections 120,000 --- 120,000 120,000

Setups 50,000 --- 50,000 50,000

Purchasing 220,000 --- 220,000 220,000

Total $425,000 $22 $645,000 $865,000======= === ======= =======

PPT 14 -19

Activity Flexible Budget Driver: Direct Labor Hours

Formula Level of Activity

Fixed Variable10,000 20,000

Direct materials --- $10$100,000$200,000

Direct labor --- 8 80,000 160,000

Subtotal $0 $18$180,000$360,000== ===

Driver: Machine Hours

Fixed Variable8,000 16,000

Maintenance $20,000 $5.50$64,000$108,000

Machining 15,000 2.00 31,000 47,000

Subtotal $35,000 $7.50$95,000$155,000====== ====

PPT 14 -20

Activity Flexible Budget (continued)

Driver: Number of Setups

Fixed Variable 25 30

Inspections $80,000 $2,100 $132,500 $143,000

Setups --- 1,800 45,000 54,000

Subtotal $80,000 $3,900 $177,500 $197,000====== =====

Driver: Number of Orders

Fixed Variable 15,000 25,000

Purchasing $211,000 $1 $226,000 $236,000======= ==

Total $678,000 $948,000======= =======

PPT 14 -21

Activity-Based Performance Report

Actual Costs Budgeted Costs Budget Variance

Direct materials $101,000 $100,000 $1,000 U

Direct labor 80,000 80,000 ---

Maintenance 55,000 64,000 9,000 F

Machining 29,000 31,000 2,000 F

Inspections 125,500 132,500 7,000 F

Setups 46,500 45,000 1,500 U

Purchasing 220,000 226,000 6,000 F

Total $657,000 $678,500 $21,500 F======= ======= ======

PPT 14 -22

Variances for the Inspection Activity

Activity Actual Cost Budgeted Cost Variance

Inspection:

Fixed $ 82,000 $ 80,000 $2,000 U

Variable 43,500 52,500 9,000 F

Total $125,500 $132,500 $7,000 F======= =======

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