2Activity-based costing Allocation processDoes not reduce or create costsDoes determine the cost to perform activitiesForms the basis for process improvementActivity-based management
3Activity-based management Evaluates the cost and value of activities to identify opportunities for improvementHigh or low value to the customer?Enhance value-added activitiesReduce non-value-added activities
4Value- vs. non-value-added Would the customer willingly pay for the cost of the activity?Would the customer encourage doing more of the activity?Does the activity help the organization reach its goals?
5Value-added vs. non-value-added activities ActivityMaterial handlingSet-upAssemblyTesting and inspectionReworkPackagingBreaks and meetingsValue-added?NoYesMaybe
6Value-added vs. non-value-added activities Determination is often subjectiveSome are obviousOthers may be necessary, but do not add value to the customerUse rating scale to categorizeToo much or too little detail can hurtShould use a team-based approachMust consider interactions
7Steps in the ABM process Activity analysisValue-adding?Customer’s viewpointNecessary evilNon-value-addingCost
8Steps in the ABM process Identify opportunities for improvementLow value-addingWillie Sutton ruleIdentify the root cause of the problem“The 5 why’s”Fix the problem, not treat the symptoms
9Steps in the ABM process Estimate cost and cost savingsWhat will the changes cost?How much will they save?Make the changesEvaluate resultsAre expected results achieved?Repeat the process
10ABC/ABM implementation considerations Management commitmentScope of projectDetermines resources neededResourcesPersonnelTimeTechnology
11ABC/ABM implementation considerations Organizational cultureAcceptance of changeWillingness to use the informationOpen communicationSharing ideasRumor controlTeamwork
12Cost of unused capacity CAM-I capacity modelProductive capacityOutput of saleable productNon-productive capacityCapacity lost to non-productive activitiesSet-ups, maintenance, defects, delays, etc.Idle capacityUnused capacityWeekends, vacations, lack of orders, etc.
13Cost of unused capacity Identifying cost of unused capacityResources supplied – resources usedIdentifies opportunities for improvementReduce capacityIncrease output without incurring more of the costSome unused capacity is inevitable and good