Presentation on theme: "Activity- and Strategy-Based Responsibility Accounting"— Presentation transcript:
1 Activity- and Strategy-Based Responsibility Accounting CHAPTER
2 After studying this chapter, you should be able to: Objectives1. 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.After studying this chapter, you should be able to:
3 Responsibility Accounting Model The responsibility accounting model is defined by four essential elements:Assigning responsibilityEstablishing performance measures or benchmarksEvaluating performanceAssigning rewards
4 Types of Responsibility Accounting Management accounting offers the following three types of responsibility accounting systems.Functional-basedActivity-basedStrategic-based
5 Based Responsibility Accounting System Functional-Based Responsibility Accounting SystemA functional-based responsibility accounting system assigns responsibility to organizational units and expresses performance measures in financial terms.It is the responsibility accounting system that was developed when most firms were operating in relatively stable environments.
6 Elements of a Functional-Based Responsibility Accounting System
7 Responsibility Is Defined Individual in ChargeOrganizational UnitResponsibility Is DefinedOperating EfficiencyFinancial OutcomesPerformance Measures Are EstablishedUnit BudgetsStandard CostingStatic StandardsCurrently Attainable Stds.Performance Is MeasuredFinancial EfficiencyControllable CostsActual vs. StandardFinancial MeasuresIndividuals Are Rewarded Based on Financial PerformancePromotionsBonusesProfit SharingSalary Increases
8 Based Responsibility Accounting System Activity-Based Responsibility Accounting SystemAn activity-based responsibility accounting system assigns responsibility to processes and uses both financial and nonfinancial measures of performance.It is the responsibility accounting system developed for those firms operating in continuous improvement environments.
9 Elements of an Activity-Based Responsibility Accounting System
10 Responsibility Is Defined ProcessResponsibility Is DefinedTeamValue ChainFinancialPerformance Measures Are EstablishedOptimalDynamicProcess OrientedValue-AddedPerformance Is MeasuredTime ReductionsQuality ImprovementCost ReductionsTrend MeasuresIndividuals Are Rewarded Based on Multidimensional PerformancePromotionsBonusesGain- SharingSalary Increases
11 Based Responsibility Accounting System Strategy-Based Responsibility Accounting SystemA 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 perspectiveThe customer perspectiveThe process perspectiveThe infrastructure (learning and growth) perspective
12 Elements of a Strategy-Based Responsibility Accounting System
13 Responsibility Is Defined CustomerResponsibility Is DefinedFinancialProcessInfrastructurePerformance Measures Are EstablishedCommunica-tion StrategyBalanced MeasuresAlignment of ObjectivesLink to StrategyPerformance Is MeasuredFinancial MeasuresCustomer MeasuresProcess MeasuresInfrastructure MeasuresIndividuals Are Rewarded Based on Multidimensional PerformancePromotionsBonusesGain- SharingSalary Increases
14 Activity-Based Management (ABM) Activity-based management (ABM) is a systemwide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the profit achieved by providing this value.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 Activity-Based Management Model Cost DimensionResourcesProcess DimensionDriver AnalysisWhy?ActivitiesWhat?Performance AnalysisHow well?Products and Customers
16 Process Value Analysis 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 is concerned with:Driver analysisActivity analysisActivity performance measurement
17 Activity analysis should produce four outcomes: 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 Value-Added Activities Those activities necessary to remain in business are called value-added activities.Value-Added Activities
19 Value-Added Activities Activities needed to comply with the reporting requirements, such as the SEC, are value-added by a mandate.Value-Added Activities
20 Value-Added Activities A discretionary activity is classified as value-added provided it simultaneously satisfies three conditions: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 Activities
21 Nonvalue-Added Activities All activities other than those essential to remain in business are referred to as nonvalue-added activities.Nonvalue-Added Activities
23 Activity Analysis Can Reduce Costs in Four Ways: Activity eliminationActivity selectionActivity reductionActivity sharing
24 Efficiency Quality Time Measures of Activity PerformanceEfficiencyQualityTime
25 Measures of Activity Performance Financial measures of activity efficiency include:Value and nonvalue-added activity cost reportsTrends in activity cost reportsKaizen standard settingBenchmarkingLife-cycle costing
26 Value- and Nonvalue-Added Cost Reporting Activity Activity Driver SQ AQ SPWelding Welding hours 10,000 8,000 $40Rework Rework hours 0 10,000 9Setups Setup hours 0 6,000 60Inspection Number of inspections 0 4,000 15Value-added standards call for their elimination
27 Value- and Nonvalue-Added Cost Reporting Activity Activity Driver SQ AQ SPWelding Welding hours 10,000 8,000 $40Rework Rework hours 0 10,000 9Setups Setup hours 0 6,000 60Inspection Number of inspections 0 4,000 15Value-added standards call for their elimination
28 Formulas Value-added costs = SQ x SP Nonvalue-added costs = (AQ – SQ)SPWhere SQ = The value-added output level of an activitySQ = The standard price per unit of activity output measureAQ = The actual quantity used of flexible resources or the practical activity capacity acquired for committed resources
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 Kaizen Cost Reduction Process CheckCheckActActDoDoPlanSearchLock inStandardKaizen SubcycleMaintenance Subcycle
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 Activity Capacity Variance AQ = Activity capacity acquired (practical capacity)SQ = Activity capacity that should be usedAU = Actual usage of the activitySP = Fixed activity rateSP x SQ$2,000 x 0$0SP x AQ$2,000 x 60$120,000SP x AU$2000 x 40$80,000ActivityVolume Variance$120,000 UUnusedCapacity Variance$40,000 F
36 Life-Cycle Cost Commitment Curve 100908070605040302010Cost Commitment Curve90 percent of life-cycle costs are committed at this pointPlanning Design Testing Production Logistics
37 Target CostingA 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-Costing Model Target Price Market Share Objective Product FunctionalityTarget ProfitTarget-Costing ModelTarget CostProduct and Process DesignNOTarget Cost Met?Produce ProfitYES
39 Unit Cost and Price Information for New Product Life-Cycle Costing: Budgeted Costs and IncomeUnit Cost and Price Information for New ProductUnit production cost $ 6Unit life-cycle costUnit whole-life costBudgeted unit selling price
40 Development costs $200,000 ---- ---- $ 200,000 Budgeted CostsItem Item TotalDevelopment costs $200, $ 200,000Production costs ---- $240,000 $360, ,000Logistic costs , , ,000Annual subtotal $200,000 $320,000 $480,000 $1,000,000Postpurchase costs , , ,000Annual total $200,000 $400,000 $600,000 $1,200,000Units produced 40,000 60,000Note: The post purchase costs are costs incurred by the customer and are notincluded in the budgeted income e statement.
41 Budgeted Product Income Statements Annual CumulativeYear Revenues Costs Income IncomeBudgeted Product Income Statements$200,000 -$200,000 -$200,0002004 $600, , , ,000, , , ,000
42 Performance Report for Life-Cycle Costs Year Item Actual Costs Budgeted Costs Variance2003 Development $190,000 $200,000 $10,000 F2004 Production 300, ,000 60,000 ULogistics 75,000 80,000 5,000 F2005 Production 435, ,000 75,000 ULogistics 110, ,000 10,000 FAnalysis: 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.
43 The Balanced Scorecard The Balanced Scorecard translates an organization’s mission and strategy into operational objectives and performance measures for four different perspectives:The Balanced ScorecardThe financial perspectiveThe customer perspectiveThe internal business process perspectiveThe 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 Strategy-Translation Process Vision and StrategyFinancialInfrastructureCustomerProcessObjectivesMeasuresStrategy-Translation ProcessTargetsInitiatives
47 Summary of Objectives and Measures: Financial Perspective Objectives MeasuresRevenue Growth:Increase the number of new Percentage of revenue products from new productsCreate new applications Percentage of repeat customersDevelop new customers and Percentage of revenue frommarkets new sourcesAdopt a new pricing strategy Product and customer profitability
48 Objectives MeasuresCost Reduction:Reduce unit product cost Unit product costReduce unit customer cost Unit customer costReduce distribution channel cost Cost per distribution channelAsset Utilization:Improve asset utilization Return on investmentEconomic value added
49 Summary of Objectives and Measures: Customer Perspective Objectives MeasuresCore:Increase market share Market share (percentage ofmarket)Increase customer retention Percentage of repeat customersIncrease customer acquisition Number of new customersIncrease customer satisfaction Ratings from customersurveysIncrease customer profitability Customer profitability
50 Objectives MeasuresPerformance Value:Decrease price PriceDecrease postpurchase costs Postpurchase costsImprove product functionality Ratings from customersurveysImprove product quality Percentage of returnsIncrease delivery reliability On-time delivery percentageAging scheduleImprove product image and Ratings from customerreputation surveys
51 Actual Conversion Cost per Unit Theoretical Conversion Cost per Unit Standard costs per minute = $1,600,000/400,000= $4 per minuteActual cycle time = 60 minutes/10 units= 6 minutes per unitActual conversion costs = $4 x 6= $24 per unitTheoretical Conversion Cost per UnitTheoretical cycle time = 60 minutes/12 units= 5 minutes per unitTheoretical conversioncosts = $4 x 5= $20 per unit
52 Summary of Objectives and Measures: Process Perspective Objectives MeasuresInnovation:Increase the number of new Number of new products vs.products plannedIncrease proprietary products Percentage of revenue fromproprietary productsDecrease new product Time to market (from startdevelopment time to finish)
53 Objectives MeasuresOperations:Increase product quality Quality costsOutput yieldsPercentage of defective unitsIncrease process efficiency Unit cost trendsOutput/input(s)Decrease process time Cycle time and velocityMCEPostsales Service:Increase service quality First-pass yieldsIncrease service efficiency Cost trendsDecrease service time Cycle time
54 Summary of Objectives and Measures: Learning and Growth Perspective Objectives MeasuresIncrease employee capabilities Employee satisfaction ratingsEmployee turnover percentageEmployee productivity(revenue/employee)Hours of trainingStrategic job coverage ratio(percentage of critical jobrequirements filled)
55 Objectives MeasuresIncrease motivation and Suggestions per employeealignment Suggestions implemented peremployeeIncrease information systems Percentage of processes withcapabilities real-time feedbackcapabilitiesPercentage of customer-facingemployees with on-lineaccess to customer andproduct information