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10 -1 Activity- and Strategy-Based Responsibility Accounting CHAPTER.

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Presentation on theme: "10 -1 Activity- and Strategy-Based Responsibility Accounting CHAPTER."— Presentation transcript:

1 10 -1 Activity- and Strategy-Based Responsibility Accounting CHAPTER

2 Compare and contrast functional-based, activity-based, and strategic-based responsibility accounting systems. 2.Explain process value analysis. 3.Describe activity performance measurement. 4.Discuss the basic features of the Balanced Scorecard. ObjectivesObjectives After studying this chapter, you should be able to:

3 10 -3 Responsibility Accounting Model Assigning responsibility Establishing performance measures or benchmarks Evaluating performance Assigning rewards The responsibility accounting model is defined by four essential elements:

4 10 -4 Functional-based Activity-based Strategic-based Types of Responsibility Accounting Management accounting offers the following three types of responsibility accounting systems.

5 10 -5 A functional-based responsibility accounting system assigns responsibility to organizational units and expresses performance measures in financial terms. Functional- Based Responsibility Accounting System Functional- Based Responsibility Accounting System It is the responsibility accounting system that was developed when most firms were operating in relatively stable environments.

6 10 -6 Elements of a Functional-Based Responsibility Accounting System

7 10 -7 Responsibility Is Defined Individual in Charge Operating Efficiency Financial Outcomes Unit Budgets Static Standards Standard Costing Currently Attainable Stds. Financial Efficiency Actual vs. Standard Controllable Costs Financial Measures Performance Measures Are Established Performance Is Measured Individuals Are Rewarded Based on Financial Performance Profit Sharing PromotionsBonuses Salary Increases Organizational Unit

8 10 -8 An activity-based responsibility accounting system assigns responsibility to processes and uses both financial and nonfinancial measures of performance. Activity- Based Responsibility Accounting System Activity- Based Responsibility Accounting System It is the responsibility accounting system developed for those firms operating in continuous improvement environments.

9 10 -9 Elements of an Activity-Based Responsibility Accounting System

10 Responsibility Is Defined Team Value Chain Optimal Process Oriented Dynamic Value- Added Time Reductions Cost Reductions Quality Improvement Trend Measures Performance Measures Are Established Performance Is Measured Individuals Are Rewarded Based on Multidimensional Performance Gain- Sharing PromotionsBonuses Salary Increases Financial Process

11 Strategy- Based Responsibility Accounting System Strategy- Based Responsibility Accounting System A strategic-based responsibility accounting system (Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives: The financial perspective The customer perspective The process perspective The infrastructure (learning and growth) perspective

12 Elements of a Strategy-Based Responsibility Accounting System

13 Responsibility Is Defined Financial Process Communica- tion Strategy Alignment of Objectives Balanced Measures Link to Strategy Financial Measures Process Measures Customer Measures Infrastructure Measures Performance Measures Are Established Performance Is Measured Individuals Are Rewarded Based on Multidimensional Performance Gain- Sharing PromotionsBonuses Salary Increases Infrastructure Customer

14 Activity-based management (ABM) is a systemwide, integrated approach that focuses managements attention on activities with the objective of improving customer value and the profit achieved by providing this value. Activity-Based Management (ABM) Activity-based management encompasses both product costing and process value analysis. The activity-based management model has two dimension: a cost dimension and a process dimension.

15 Cost Dimension Activity-Based Management ModelResources Process Dimension Driver Analysis Why? Performance Analysis How well? Products and Customers Activities What?

16 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 Process value analysis is concerned with: Driver analysis Activity analysis Activity performance measurement

17 Activity Analysis Activity analysis is the process of identifying, describing, and evaluating the activities an organization performs. Activity analysis should produce four outcomes: What activities are done. How many people perform the activities. The time and resources are required to perform the activities. An assessment of the value of the activities to the organization.

18 Those activities necessary to remain in business are called value-added activities. Value- Added Activities

19 Activities needed to comply with the reporting requirements, such as the SEC, are value-added by a mandate. Value- Added Activities

20 A discretionary activity is classified as value-added provided it simultaneously satisfies three conditions: Value- Added Activities 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.

21 All activities other than those essential to remain in business are referred to as nonvalue- added activities. Nonvalue -Added Activities

22 Nonvalue- Added Activities Scheduling Moving Waiting Inspecting Storing

23 Activity Analysis Activity elimination Activity selection Activity reduction Activity sharing Activity Analysis Can Reduce Costs in Four Ways:

24 Efficiency Quality Time Measures of Activity Performance

25 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 Life-cycle costing

26 Value- and Nonvalue-Added Cost Reporting ActivityActivity DriverSQAQSP WeldingWelding hours10,0008,000$40 ReworkRework hours010,0009 SetupsSetup hours06,00060 InspectionNumber of inspections04,00015 Value-added standards call for their elimination

27 Value- and Nonvalue-Added Cost Reporting ActivityActivity DriverSQAQSP WeldingWelding hours10,0008,000$40 ReworkRework hours010,0009 SetupsSetup hours06,00060 InspectionNumber of inspections04,00015 Value-added standards call for their elimination

28 Value-added costs = SQ x SP Nonvalue-added costs = (AQ – SQ)SP Where SQ = The value-added output level of an activity SQ =The standard price per unit of activity output measure AQ =The actual quantity used of flexible resources or the practical activity capacity acquired for committed resources Formulas

29 Welding$400,000$ - 80,000$320,000 Rework090,00090,000 Setups0360,000360,000 Inspection 0 60,000 60,000 Total$400,000$430,000$830,000 Value- and Nonvalue- Added Cost Report Value-Added Nonvalue- Actual Value-Added Nonvalue- Actual Activity Costs Added Costs Costs Activity Costs Added Costs Costs

30 Welding-$80,000$ 50,000$ 30,000 Rework90,00070,00020,000 Setups360,000200,000160,000 Inspection 60,000 35,000 25,000 Total$430,000$355,000$235,000 Nonvalue-Added Costs Nonvalue-Added Costs Activity Change Activity Change Trend Report: Nonvalue-Added Costs

31 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.

32 Act Kaizen Cost Reduction Process DoDo Kaizen SubcycleMaintenance Subcycle Check Plan Search Check Act Standard Lock in

33 Benchmarking uses best practices as the standard for evaluating activity performance.

34 Activity Capacity Management Activity capacity is the number of times an activity can be performed.

35 AQ = Activity capacity acquired (practical capacity) SQ = Activity capacity that should be used AU = Actual usage of the activity SP = Fixed activity rate SP x SQ $2,000 x 0 $0 Activity Volume Variance $120,000 U Unused Capacity Variance $40,000 F Activity Capacity Variance SP x AQ $2,000 x 60 $120,000 SP x AU $2000 x 40 $80,000

36 Life-Cycle Cost Commitment Curve Planning Design Testing Production Logistics Cost Commitment Curve Life Cycle Cost % 90 percent of life- cycle costs are committed at this point

37 Target Costing A target cost is the difference between the sales price needed to capture a predetermined market share and the desired per-unit profit. Example: Current product specifications and the targeted market share call for a sales price of $250,000. The required profit is $50,000 per unit. The target cost is computed as follows: $250,000 – $50,000 = $200,000

38 Target Cost Target Price Market Share Objective Product Functionality Target Profit Product and Process Design Target Cost Met? NO Produce Profit YES Target- Costing Model

39 Unit Cost and Price Information for New Product Unit production cost $ 6 Unit life-cycle cost 10 Unit whole-life cost 12 Budgeted unit selling price 15 Life-Cycle Costing: Budgeted Costs and Income

40 Budgeted Costs Development costs$200, $ 200,000 Production costs----$240,000$360,000600,000 Logistic costs , , ,000 Annual subtotal$200,000$320,000$480,000$1,000,000 Postpurchase costs , , ,000 Annual total$200,000$400,000$600,000$1,200,000 Units produced40,00060,000 Note: The post purchase costs are costs incurred by the customer and are not included in the budgeted income e statement. Item Item Total Item Item Total

41 $200,000-$200,000-$200, $600, , ,000 80, , , , ,000 Annual Cumulative YearRevenuesCosts Income Income Budgeted Product Income Statements

42 Performance Report for Life-Cycle Costs 2003Development$190,000$200,000$10,000F 2004Production300,000240,00060,000U Logistics75,00080,0005,000F 2005Production435,000360,00075,000U Logistics110,000120,00010,000F Analysis: Production costs were higher than expected because insertions of diodes and integrated circuits also drive costs (both production and postpurchase costs). Conclusion: The design of future products should try to minimize total insertions. Year Item Actual Costs Budgeted Costs Variance Year Item Actual Costs Budgeted Costs Variance

43 The Balanced Scorecard translates an organizations mission and strategy into operational objectives and performance measures for four different perspectives: The financial perspective The customer perspective The internal business process perspective The learning and growth perspective

44 Strategy, according to Robert Kaplan and David Norton, is defined as... choosing the market and customer segments the business unit intends to serve, identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.

45 Vision and Strategy Financial Infrastructure CustomerProcess Objectives Measures Targets Initiatives Strategy- Translation Process

46 Testable Strategy Illustrated Quality Training Infra- structure Redesign Products Process Reduce Defective Units Increase Customer Satisfaction Customer Increase Market Share Increase Sales Financial Increase Profits

47 Summary of Objectives and Measures: Financial Perspective Objectives Measures Revenue Growth: Increase the number of new Percentage of revenue products from new products Create new applicationsPercentage of repeat customers Develop new customers and Percentage of revenue from markets new sources Adopt a new pricing strategyProduct and customer profitability

48 Objectives Measures Cost Reduction: Reduce unit product costUnit product cost Reduce unit customer costUnit customer cost Reduce distribution channel costCost per distribution channel Asset Utilization: Improve asset utilizationReturn on investment Economic value added

49 Summary of Objectives and Measures: Customer Perspective Objectives Measures Core: Increase market shareMarket share (percentage of market) Increase customer retentionPercentage of repeat customers Increase customer acquisitionNumber of new customers Increase customer satisfactionRatings from customer surveys Increase customer profitabilityCustomer profitability

50 Objectives Measures Performance Value: Decrease pricePrice Decrease postpurchase costsPostpurchase costs Improve product functionalityRatings from customer surveys Improve product qualityPercentage of returns Increase delivery reliabilityOn-time delivery percentage Aging schedule Improve product image and Ratings from customer reputationsurveys

51 Actual Conversion Cost per Unit Standard costs per minute= $1,600,000/400,000 = $4 per minute Actual cycle time= 60 minutes/10 units = 6 minutes per unit Actual conversion costs= $4 x 6 = $24 per unit Theoretical Conversion Cost per Unit Theoretical cycle time= 60 minutes/12 units = 5 minutes per unit Theoretical conversion costs= $4 x 5 = $20 per unit

52 Summary of Objectives and Measures: Process Perspective Objectives Measures Innovation: Increase the number of newNumber of new products vs. productsplanned Increase proprietary productsPercentage of revenue from proprietary products Decrease new product Time to market (from start development timeto finish)

53 Objectives Measures Operations: Increase product qualityQuality costs Output yields Percentage of defective units Increase process efficiencyUnit cost trends Output/input(s) Decrease process timeCycle time and velocity MCE Postsales Service: Increase service qualityFirst-pass yields Increase service efficiencyCost trends Output/input(s) Decrease service timeCycle time

54 Summary of Objectives and Measures: Learning and Growth Perspective Objectives Measures Increase employee capabilitiesEmployee satisfaction ratings Employee turnover percentage Employee productivity (revenue/employee) Hours of training Strategic job coverage ratio (percentage of critical job requirements filled)

55 Objectives Measures Increase motivation and Suggestions per employee alignmentSuggestions implemented per employee Increase information systemsPercentage of processes with capabilitiesreal-time feedback capabilities Percentage of customer-facing employees with on-line access to customer and product information

56 The End Chapter Ten

57 10 -57


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