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Activity-Based Management Chapter 5. Activity-based costing  Allocation process  Does not reduce or create costs  Does determine the cost to perform.

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Presentation on theme: "Activity-Based Management Chapter 5. Activity-based costing  Allocation process  Does not reduce or create costs  Does determine the cost to perform."— Presentation transcript:

1 Activity-Based Management Chapter 5

2 Activity-based costing  Allocation process  Does not reduce or create costs  Does determine the cost to perform activities  Forms the basis for process improvement  Activity-based management

3 Activity-based management  Evaluates the cost and value of activities to identify opportunities for improvement  High or low value to the customer?  Enhance value-added activities  Reduce non-value-added activities

4 Value- 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 ?

5 Value-added vs. non-value-added activities  Activity  Material handling  Set-up  Assembly  Testing and inspection  Rework  Packaging  Breaks and meetings  Value-added?  No  Yes  Maybe  No  Maybe  No

6 Value-added vs. non-value-added activities  Determination is often subjective  Some are obvious  Others may be necessary, but do not add value to the customer  Use rating scale to categorize  Too much or too little detail can hurt  Should use a team-based approach  Must consider interactions

7 Steps in the ABM process  Activity analysis  Value-adding?  Customer’s viewpoint  Necessary evil  Non-value-adding  Cost

8 Steps in the ABM process  Identify opportunities for improvement  Low value-adding  Willie Sutton rule  Identify the root cause of the problem  “The 5 why’s”  Fix the problem, not treat the symptoms

9 Steps in the ABM process  Estimate cost and cost savings  What will the changes cost?  How much will they save?  Make the changes  Evaluate results  Are expected results achieved?  Repeat the process

10 ABC/ABM implementation considerations  Management commitment  Scope of project  Determines resources needed  Resources  Personnel  Time  Technology

11 ABC/ABM implementation considerations  Organizational culture  Acceptance of change  Willingness to use the information  Open communication  Sharing ideas  Rumor control  Teamwork

12 Cost of unused capacity  CAM-I capacity model  Productive capacity  Output of saleable product  Non-productive capacity  Capacity lost to non-productive activities  Set-ups, maintenance, defects, delays, etc.  Idle capacity  Unused capacity  Weekends, vacations, lack of orders, etc.

13 Cost of unused capacity  Identifying cost of unused capacity  Resources supplied – resources used  Identifies opportunities for improvement  Reduce capacity  Increase output without incurring more of the cost  Some unused capacity is inevitable and good


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