PPT 14 -1
ADVANCED MANAGEMENT ACCOUNTING
PPT 14 -2
Activity Based Management
PPT 14 -3
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.
PPT 14 -4
Cost Dimension
Process Dimension
Driver Analysis Activities Performance Measures
Resources
Products andCustomers
Why? What? How Well?
Activity-Based Management Model
PPT 14 -5
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 analysis
Activity analysis
Performance measurement
PPT 14 -6
Activity Analysis
Activity analysis should produce four outcomes:
What activities are performed?
How many people perform the activities?
The time and resources required to perform the activities.
An assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value.
PPT 14 -7
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.
PPT 14 -8
Nonvalue-Added Activities
Nonvalue-Added Activities are activities that add cost and impede
performance.
Scheduling
Moving
Waiting
Inspecting
Storing
Examples
PPT 14 -9
Activity Analysis
Activity elimination
Activity selection
Activity reduction
Activity sharing
Activity Analysis Can Reduce Costs in Four Ways:
PPT 14 -10
Activity Performance Measurement
Efficiency
Quality
Time
Three Dimensions of Activity Performance
PPT 14 -11
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
PPT 14 -12
Value- and Nonvalue-Added Cost Reporting
Consider the following data:
Activity Activity Driver SQ AQ SP
Welding Welding hours 10,000 8,000 $40
Rework Rework hours 0 10,000 9
Setups Setup hours 0 6,000 60
Inspection # of inspections 0 4,000 15
PPT 14 -13
Value- Nonvalue-
Activity Added Costs Added Costs Actual Costs
Welding $400,000 $ 80,000 $480,000
Rework ---- 90,000 90,000
Setups ---- 360,000 360,000
Inspection ---- 60,000 60,000
Total $400,000 $590,000 $990,000
======== ======== ========
Value- and Nonvalue-AddedCost Report (continued)
PPT 14 -14
Nonvalue-Added Costs
Activity 2000 2001 Change
Welding $ 80,000 $ 50,000 $ 30,000
Rework 360,000 200,000 160,000
Setups 90,000 70,000 20,000
Inspections 60,000 35,000 25,000
Total $590,000 $355,000 $235,000
======== ======== ========
Trend Report: Nonvalue-Added Costs
PPT 14 -15
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.
PPT 14 -16
Improving Performance ThroughBenchmarking
Organization A Organization BCost of Processing a
Purchase Order is
$20
Cost of Processing a
Purchase Order is
$15
Share
Information
How do we improve?
PPT 14 -17
Activity-Based Budgeting
Activity flexible budgeting is the
prediction of what activity costs will be as activity output changes.
PPT 14 -18
Flexible Budget: Direct Labor Hours
Cost Formula Direct Labor Hours
Fixed Variable 10,000 20,000
Direct materials --- $10 $100,000 $200,000
Direct labor --- 8 80,000 160,000
Maintenance $ 20,000 3 50,000 80,000
Machining 15,000 1 25,000 35,000
Inspections 120,000 --- 120,000 120,000
Setups 50,000 --- 50,000 50,000
Purchasing 220,000 --- 220,000 220,000
Total $425,000 $22 $645,000 $865,000======= === ======= =======
PPT 14 -19
Activity Flexible Budget Driver: Direct Labor Hours
Formula Level of Activity
Fixed Variable10,000 20,000
Direct materials --- $10$100,000$200,000
Direct labor --- 8 80,000 160,000
Subtotal $0 $18$180,000$360,000== ===
Driver: Machine Hours
Fixed Variable8,000 16,000
Maintenance $20,000 $5.50$64,000$108,000
Machining 15,000 2.00 31,000 47,000
Subtotal $35,000 $7.50$95,000$155,000====== ====
PPT 14 -20
Activity Flexible Budget (continued)
Driver: Number of Setups
Fixed Variable 25 30
Inspections $80,000 $2,100 $132,500 $143,000
Setups --- 1,800 45,000 54,000
Subtotal $80,000 $3,900 $177,500 $197,000====== =====
Driver: Number of Orders
Fixed Variable 15,000 25,000
Purchasing $211,000 $1 $226,000 $236,000======= ==
Total $678,000 $948,000======= =======
PPT 14 -21
Activity-Based Performance Report
Actual Costs Budgeted Costs Budget Variance
Direct materials $101,000 $100,000 $1,000 U
Direct labor 80,000 80,000 ---
Maintenance 55,000 64,000 9,000 F
Machining 29,000 31,000 2,000 F
Inspections 125,500 132,500 7,000 F
Setups 46,500 45,000 1,500 U
Purchasing 220,000 226,000 6,000 F
Total $657,000 $678,500 $21,500 F======= ======= ======
PPT 14 -22
Variances for the Inspection Activity
Activity Actual Cost Budgeted Cost Variance
Inspection:
Fixed $ 82,000 $ 80,000 $2,000 U
Variable 43,500 52,500 9,000 F
Total $125,500 $132,500 $7,000 F======= =======
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