© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Maryanne M. Mowen and Don R. Hansen Introduction to Cost Accounting

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Activity-Based Management 12

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part The Relationship of Activity- Based Costing and Activity- Based Management Continuous Improvement is a process of improving performance by constantly searching for ways to eliminate waste. Activity-based management (ABM): a system wide, integrated approach that focuses management’s attention on activities with the objectives of improving customer value and the profit achieved by providing this value Activity-Based costing (ABC) is the major source of information for activity based management. 1

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part The Relationship of Activity-Based Costing and Activity-Based Management 1 The Two-Dimensional Activity-Based Management Model

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Process Value Analysis 2 Process value analysis is fundamental to activity-based responsibility accounting, focuses on accountability for activities rather than costs, and emphasizes the maximization of system wide performance instead of individual performance. Process value analysis is concerned with: 1) Driver analysis 2) Activity analysis 3) Performance measurement

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 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. Activities can be Value Added or Non Value Added.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Process Value Analysis 2 Value Added Activities: Activities necessary to remain in business Activities that contribute to customer value and/or help meet an organization’s needs Some activities are discretionary but are also value added: 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 Value Added costs are the costs to perform value added activities with perfect efficiency.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Process Value Analysis 2 Non-Value Added Activities: All activities other than those essential to remain in business 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 In manufacturing, five major activities are considered wasteful and unnecessary: 1. Scheduling 2. Moving 3. Waiting 4. Inspecting 5. Storing

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Process Value Analysis 2 Activity management can reduce costs in four ways: 1.Activity elimination 2.Activity selection 3.Activity reduction 4.Activity sharing

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial Measures of Activity Efficiency 3 Kaizen Cost Reduction Process

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial Measures of Activity Efficiency 3 Benchmarking: a complimentary approach to kaizen costing and activity- based management uses best practices found within and outside the organization as the standard for evaluating and improving activity performance. Internal Benchmarking Benchmarking against internal operations External Benchmarking Benchmarking that involves comparison with others outside the organization

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial Measures of Activity Efficiency 3 Activity Flexible Budgeting The prediction of what activity costs will be as activity output changes Flexible Budget: Direct Labor Hours

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial Measures of Activity Efficiency 3 Activity Flexible Budget

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial Measures of Activity Efficiency 3 Activity-Based Performance Report

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial Measures of Activity Efficiency 3 Activity Capacity is the number of times an activity can be performed. What should the activity capacity be? How much of the capacity acquired was actually used?

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Implementing Activity-Based Management Activity-Based Management (ABM) has the broad objectives of: Improving decision making by providing accurate cost information Reducing costs by encouraging and supporting continuous improvement efforts 4

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Implementing Activity-Based Management 4 ABM Implementation Model

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Implementing Activity-Based Management Systems planning provides the justification for implementing ABM and addresses 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. 4

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Implementing Activity-Based Management Why ABM Implementations Fail Lack of support of higher-level management Failure to maintain support from higher level management Resistance to change Failure to integrate the new system 4

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial-Based versus Activity- Based Responsibility Accounting 5 Responsibility Accounting is a fundamental tool of managerial control Objective: to influence behavior in such a way that individual and organizational initiatives are aligned to achieve a common goal or goals. Defined by four essential elements: 1) Assigning responsibility 2) Establishing performance measures or benchmarks 3) Evaluating performance 4) Assigning rewards

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial-Based versus Activity- Based Responsibility Accounting 5 The Responsibility Accounting Model

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial-Based versus Activity-Based Responsibility Accounting 5 Responsibility Assignments Compared

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial-Based versus Activity-Based Responsibility Accounting 5 Performance Measures Compared Performance Evaluation Compared

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Financial-Based versus Activity-Based Responsibility Accounting 5 Rewards Compared

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part End of Chapter 12