Cost Management ACCOUNTING AND CONTROL HANSEN MOWEN 1

Cost Management ACCOUNTING AND CONTROL HANSEN & MOWEN 1

12 Activity-Based Management 2

The Relationship of Activity-Based Costing and Activity-Based Management 1 Activity-based management (ABM) is a systemwide, integrated approach that focuses management’s attention on activities with the objectives of improving customer value and the profit achieved by providing this value. ABC is the major source of information for activitybased management. 3

The Relationship of Activity-Based Costing and Activity-Based Management 1 The Two-Dimensional Activity-Based Management Model 4

Process Value Analysis 2 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: (1) Driver analysis (2) Activity analysis (3) Performance measurement 5

Process Value Analysis 2 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: 1) What activities are performed. 2) How many people perform the activities. 3) The time and resources are required to perform the activities. 4) An assessment of the value of the activities to the organization. 6

Process Value Analysis 2 Those activities necessary to remain in business areneeded called value-added Activities to comply with the activities. reporting requirements, such as the SEC, are in value-added by is a the notion Implicit this definition mandate. that value-added activities may contain nonessential actions that create unnecessary cost. 7

Process Value Analysis 2 All activities other than those essential to remain in business are referred to as nonvalue-added activities. These activities fail to produce a change in the product’s state or those activities that replicate work because it wasn’t done correctly the first time. 8

Process Value Analysis 2 § Scheduling Nonvalue -Added Activities § Moving § Waiting § Inspecting § Storing 9

Process Value Analysis 2 Activity management can reduce costs in four ways: 1. 2. 3. 4. Activity elimination Activity selection Activity reduction Activity sharing 10

Process Value Analysis 2 Assessing Activity Performance ü Efficiency ü Quality ü Time 11

Financial Measures of Activity Efficiency 3 Financial measures of activity efficiency include: § Value- and nonvalue-added activity costs § Trends in activity costs § Kaizen standard setting § Benchmarking § Activity flexible budgeting § Activity capacity management 12

Financial Measures of Activity Efficiency 3 Formulas for Value- and Non-Value-Added Costs 13

Financial Measures of Activity Efficiency Activity Purchasing Molding Inspecting Grinding Activity Driver Purchasing hours Molding hours Inspection hours Number of units SQ 20, 000 30, 000 0 0 3 AQ 23, 000 34, 000 6, 000 5, 000 SP $20 12 15 6 Value-added standards call for elimination 14

Financial Measures of Activity Efficiency Value- and Non-Value-Added Cost Report the Year Ended December 31, 2006 3 for 15

Financial Measures of Activity Efficiency 3 Trend Report: Non-Value-Added Costs 16

Financial Measures of Activity Efficiency 3 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. 17

Financial Measures of Activity Efficiency 3 Trend Report: Non-Value-Added Costs Search Lock in 18

Financial Measures of Activity Efficiency 3 Benchmarking uses best practices as the standard for evaluating activity performance. Benchmarking against internal operations is called internal benchmarking. 19

Financial Measures of Activity Efficiency 3 Flexible Budget: Direct Labor Hours 20

Financial Measures of Activity Efficiency 3 Activity Flexible Budget 21

Financial Measures of Activity Efficiency 3 Activity Flexible Budget 22

Financial Measures of Activity Efficiency 3 Activity-Based Performance Report* *Actual levels of drivers: 10, 000 direct labor hours, 8, 000 machine hours, 25 setups, and 15, 000 orders. 23

Financial Measures of Activity Efficiency 3 24

Financial Measures of Activity Efficiency 3 Activity Capacity Variance 25

Financial Measures of Activity Efficiency 3 Activity capacity is the number of times an activity can be performed. 26

Implementing Activity-Based Management 4 ABM Implementation Model (Continued on next slide) 27

Implementing Activity-Based Management 4 ABM Implementation Model (Continued from previous slide) 28

Implementing Activity-Based Management 4 Systems planning provides the justification for implementing ABM and address the following issues: 1. The purpose and objectives of the ABM system. 2. The organization’s current and desired competitive position. 3. The organization’s business processes and product mix. 4. The timeline, assigned responsibilities, and resources required for implementation. 5. The ability of the organization to implement, learn, and use new information. 29

Implementing Activity-Based Management 4 Why ABM Implementations Fail Ø Lack of support of higher-level management. Ø Failure to maintain support from higher-level management. Ø Resistance to change. Ø Failure to integrate the new system. 30

Financial-Based versus Activity-Based Accounting Responsibility 5 The Responsibility Accounting Model 31

Financial-Based versus Activity-Based Accounting Responsibility 5 Responsibility Assignments Compared 32

Financial-Based versus Activity-Based Accounting Responsibility 5 Performance Measures Compared 33

Financial-Based versus Activity-Based Accounting Responsibility 5 Performance Evaluation Compared 34

Financial-Based versus Activity-Based Accounting Responsibility 5 Rewards Compared 35

End of Chapter 12 36