ADVANCED MANAGEMENT ACCOUNTING PPT 14 1 Activity Based

ADVANCED MANAGEMENT ACCOUNTING PPT 14 -1

Activity Based Management PPT 14 -2

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 -3

Activity-Based Management Model Cost Dimension Process Dimension Driver Analysis Why? Resources Activities What? Performance Measures How Well? Products and Customers PPT 14 -4

Process Value Analysis Process value analysis is fundamental to activitybased 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 -5

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 -6

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 -7

Nonvalue-Added Activities are activities that add cost and impede performance. Scheduling Moving Waiting Examples Inspecting Storing PPT 14 -8

Activity Analysis Can Reduce Costs in Four Ways: Activity elimination Activity selection Activity reduction Activity sharing PPT 14 -9

Activity Performance Measurement Three Dimensions of Activity Performance l Efficiency l Quality l Time PPT 14 -10

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 -11

Value- and Nonvalue-Added Cost Reporting Consider the following data: Activity Driver SQ AQ SP Welding hours 10, 000 8, 000 $40 Rework hours 0 10, 000 9 Setups Setup hours 0 6, 000 60 Inspection # of inspections 0 4, 000 15 PPT 14 -12

Value- and Nonvalue-Added Cost Report (continued) Activity Value. Added Costs Nonvalue. Added Costs Actual Costs Welding $400, 000 $ 80, 000 $480, 000 Rework ---- 90, 000 Setups ---- 360, 000 Inspection ---- 60, 000 $400, 000 $590, 000 $990, 000 Total ======== PPT 14 -13

Trend Report: Nonvalue-Added Costs Activity Nonvalue-Added Costs 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 $590, 000 $355, 000 $235, 000 Total ======== PPT 14 -14

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 -15

Improving Performance Through Benchmarking Organization A Cost of Processing a Purchase Order is $20 Share Information Organization B Cost of Processing a Purchase Order is $15 How do we improve? PPT 14 -16

Activity-Based Budgeting Activity flexible budgeting is the prediction of what activity costs will be as activity output changes. PPT 14 -17

Flexible Budget: Direct Labor Hours Cost Formula Fixed Direct Labor Hours Variable 10, 000 20, 000 Direct materials --- $100, 000 $200, 000 Direct labor --- 8 80, 000 160, 000 Maintenance $ 20, 000 3 50, 000 80, 000 Machining 15, 000 25, 000 35, 000 Inspections 120, 000 --- 120, 000 Setups --- 50, 000 Purchasing 1 50, 000 220, 000 --- 220, 000 Total $425, 000 $22 ======= $645, 000 $865, 000 ===== PPT 14 -18

Activity Flexible Budget Driver: Direct Labor Hours Formula Fixed Level of Activity Variable 10, 000 20, 000 Direct materials --- $100, 000 $200, 000 Direct labor --- 8 80, 000 160, 000 $180, 000 $360, 000 Subtotal == $0 === Driver: Machine Hours Fixed Maintenance Machining Variable 8, 000 16, 000 $20, 000 $5. 50 $64, 000 $108, 000 15, 000 2. 00 Subtotal $35, 000 $7. 50 ====== 31, 000 47, 000 $95, 000 $155, 000 PPT 14 -19

Activity Flexible Budget (continued) Driver: Number of Setups Fixed Inspections Setups --- Subtotal Variable 25 30 $80, 000 $2, 100 $132, 500 $143, 000 1, 800 45, 000 $80, 000 $3, 900 54, 000 $177, 500 $197, 000 ====== Driver: Number of Orders Fixed Purchasing Total Variable 15, 000 25, 000 $211, 000 $1 $226, 000 $236, 000 ===== $678, 000 $948, 000 ======= PPT 14 -20

Activity-Based Performance Report Actual Costs Budgeted Costs Direct materials $101, 000 $100, 000 $1, 000 Direct labor 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 45, 000 1, 500 U 220, 000 226, 000 46, 500 Purchasing Total $657, 000 $678, 500 $21, 500 ======= Budget Variance U F F ======= PPT 14 -21

Variances for the Inspection Activity Actual Cost Budgeted Cost Variance Inspection: Fixed Variable $ 82, 000 $ 80, 000 $2, 000 43, 500 U 52, 500 9, 000 F Total $125, 500 $132, 500 $7, 000 ====== F ======= PPT 14 -22