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Gail B. WrightGail B. WrightProfessor Emeritus of AccountingProfessor Emeritus of AccountingBryant UniversityBryant University

© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and

South-Western are trademarks used herein under license.

MANAGEMENT ACCOUNTING

8th EDITION

BY

HANSEN & MOWEN

5 ACTIVITY-BASED MANAGEMENT

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LEARNING GOALS

After studying this chapter, you should be able to:

LEARNING OBJECTIVES

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1. Describe activity-based management & explain its relationship to activity-based costing.

2. Explain process value analysis.3. Describe activity performance

measurement.4. Describe activity-based customer &

supplier costing

LEARNING OBJECTIVES

Click the button to skip Questions to Think About

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QUESTIONS TO THINK ABOUT:Roberts Truck Products (RTP)

Why is accurate cost information about customers & suppliers

important?

What is wrong with the claim that all customers are good customers?

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QUESTIONS TO THINK ABOUT: Roberts Truck Products (RTP)

Will accurate cost information guarantee that a firm is

competitive?

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QUESTIONS TO THINK ABOUT: Roberts Truck Products (RTP)

How can managing activities increase efficiency?

How can we determine whether activities are of value to a firm?

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QUESTIONS TO THINK ABOUT: Roberts Truck Products (RTP)

What role, if any, do cost reports play in managing

activities?

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1Describe activity-based management & explain its relationship to activity-based costing.

LEARNING OBJECTIVE

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ACTIVITY-BASED MANAGEMENT: Definition

A systemwide, integrated approach that focuses

management’s attention on activities for improving customer

value and profit.

LO 1

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2-DIMENSIONAL ABM MODEL

EXHIBITEXHIBIT 5-15-1

LO 1

2-dimensional model shows

intersection of cost & process.

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ABM MODEL: Cost Dimension

Information about resources, activities, cost objects such as

Useful for products, customers, suppliers, distribution channels

Objective: improving accuracy of cost assignments

LO 1

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ABM MODEL: Process Dimension

Information about What activities are performedWhy activities are performedHow well they are performed

Objective: cost reductionProvides ability to engage in & measure

continuous improvement

LO 1

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ABM & ABCABM incorporates & extends ABCABM objectives

Inproving decision making with accurate cost information

Reducing costs by encouraging, supporting continuous improvements efforts

LO 1

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ABM IMPLEMENTATION MODEL

EXH

IBIT

EXH

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5-25-2

LO 1

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SYSTEMS PLANNINGAddresses these issues

Purpose, objectives of ABM systemOrganizations current & desired competitive

positionOrganization’s business processes & product mixTimeline, assigned responsibilities, resources

required for implementationAbility of organization to implement, learn, use

new information

LO 1

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ACTIVITY IDENTIFICATION, DEFINITION, CLASSIFICATIONKnowing tasks that define activity helps

improve efficiencyClassifying activities allows ABM to connect

with other continuous improvement initiativesJIT manufacturingTQMTotal environmental quality cost management

LO 1

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WHY DOES ABM FAIL?Implementation failure due to

Lack of support from higher level managementResults that do not occur as expectedSignificant investment in education, training not

madeResistance to changeFailure to integrate new system

LO 1

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ABM & RESPONSIBILITY ACCOUNTING

Responsibility accounting is fundamental tool of managerial accounting control

Also related to process value analysis (PVA)Assigning responsibilityEstablishing performance measures, benchmarksEvaluating performanceAssigning rewards

LO 1

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RESPONSIBILITY ACCOUNTING SYSTEM

3 ways to assign responsibility and measure performanceFinancial (functional)-based systemActivity-based systemStrategic-based system (Ch. 16)

LO 1

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FINANCIAL-BASED SYSTEMSAssigns responsibilities, measures

performance in financial termsUseful in environments with slow or little

changeConcrete pipes, blocks

Well- defined or relatively stable environments

LO 1

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ACTIVITY-BASED SYSTEMSDeveloped for firms in continuous

improvement environmentAssigns responsibilities to processesUses both financial & nonfinancial measures

of performanceUseful in environment that experience rapid

changeComputer technology

LO 1

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COMPARING SYSTEMS:Assigning Responsibilities

LO 1

EXHIBITEXHIBIT 5-45-4

Assignment based on function

Assignment emphasizes improvement

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COMPARING SYSTEMS:Measuring Performance

LO 1

EXHIBITEXHIBIT 5-55-5

Financial performance measures

Process improvement measures

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COMPARING SYSTEMS:Evaluating Performance

LO 1

EXHIBITEXHIBIT 5-65-6Meet/beat financial standard

Evaluates time, quality, efficiency & financial standards

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GAINSHARING: Definition

ABM system allows employees to share in gains related to specific

improvement projects.

LO 1

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2 Explain process value analysis.

LEARNING OBJECTIVE

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PROCESS VALUE ANALYSIS: Definition

PVA emphasizes accountability for activities rather than costs;

focuses on systemwide performance.

LO 2

PROCESS VALUE ANALYSIS: Definition

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PVA CONCERNS

Driver analysisActivity analysisActivity performance measurement

LO 2

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DRIVER ANALYSIS: Definition

Understanding what causes activity costs by understanding activity inputs & outputs; most

basic causes for an activity being performed.

LO 2

ROOT CAUSES: Definition

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Why are “root causes” so important?

Because the root cause of 1 activity may be root cause of

related activities.

LO 2

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ACTIVITY ANALYSIS: Definition

The process of identifying, describing, evaluating the activities an organization

performs.

LO 2

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ACTIVITY ANALYSIS OUTCOMESWhat activities are doneHow many people perform the activitiesTime, resources required to perform

activitiesAssessing value of activities to

organizationActivities can be classified as

Value-addedNon-value-added

LO 2

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What are “value-added” activities?

Value-added activities are activities that are necessary to

remain in business.

LO 2

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VALUE-ADDED ACTIVITIESAre

Mandatory to comply with lawsDiscretionary

Produces a change of stateNot achievable by preceding activitiesEnables other activities to be performed

Performed at a value-added cost to achieve perfect efficiency

Eliminate waste & reduce costs

LO 2

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NON-VALUE-ADDED ACTIVITIES

Are unnecessaryFail to satisfy 3 defining conditions of

value-added activitiesIncur non-value-added costs of

inefficiency

LO 2

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NON-VALUE-ADDED ACTIVITIES: Examples

SchedulingMovingWaitingInspectingStoring

LO 2

Challenge of activity analysis: produce goods without using non-value-added activities.

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KAIZEN COSTING: Definition

The effort to reduce costs of existing products & processes.

LO 2

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REDUCING COSTSActivity elimination

Focusing on non-value-added activitiesActivity selection

Choosing among different sets of activitiesActivity reduction

Reducing time, resources requiredActivity sharing

Using economies of scale

LO 2

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ACTIVITY PERFORMANCE MEASUREMENT: Definition

Assessing how well an activity was performed and results

achieved using both financial & nonfinancial measures.

LO 2

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ACTIVITY PERFORMANCE MEASURES

EfficiencyRelationship of activity inputs & outputs

QualityDoing it right the first time

TimeShortening activity time

LO 2

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3 Describe activity performance measurement.

LEARNING OBJECTIVE

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FINANCIAL MEASURES OF ACTIVITY PERFORMANCE

For potential & actual savingsValue- & non-value-added activity cost reportsTrends in activity cost reportsKaizen standard settingBenchmarkingLife-cycle costing

LO 3

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VALUE-ADDED STANDARD

Calls for elimination of non-value-added activities

Identifies optimal activity outputCompares actual to value-added activity costs

allowing management toAssess level of activity inefficiencyDetermine potential for improvement

LO 3

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FORMULAS

SQ: value-added output level

SP: standard price per output measure

AQ: actual quantity used of flexible resources

LO 3

Value-added = SQ x SP

Non-value-added costs = (AQ – SQ)SP

EXHIBITEXHIBIT 5-85-8

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COST REPORT: Step 1

Activity Activity Driver SQ* AQ* SP*Welding Welding hours 10,000 12,000 $40

Rework Rework hours 0 10,000 9

Setups Setup hours 0 6,000 60

Inspection # Inspections 0 4,000 15

LO 3

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COST REPORT: Step 2

ActivityValue-

Added CostsNon-Value-Added Costs

Actual Costs

Welding $400,000 $80,000 $480,000

Rework 0 90,000 90,000

Setups 0 360,000 360,000

Inspection 0 60,000 60,000

Total $ 400,000 $ 590,000 $ 990,000

LO 3

EXHIBITEXHIBIT 5-95-9

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COST REPORT: Step 2

ActivityValue-Added

Non-Value-Added

Actual Costs

Welding $400,000 $80,000 $480,000

Rework 0 90,000 90,000

Setups 0 360,000 360,000

Inspection 0 60,000 60,000

Total $ 400,000 $ 590,000 $ 990,000

LO 3

EXHIBITEXHIBIT 5-95-9

Cost report emphasizes the opportunity for improvement.

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TREND REPORTING

Allows management to follow up on actions taken to reduce costs by examining whether outcomes were as expected.

LO 3

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TREND REPORT: Step 3

ActivityLast Year

Current Year Change

Welding $80,000 $50,000 $30,000

Rework 90,000 70,000 20,000

Setups 360,000 200,000 160,000

Inspection 60,000 35,000 25,000

Total $ 590,000 $ 355,000 $ 235,000

LO 3

EXHIBITEXHIBIT 5-105-10

Trend report shows improvement that has been made.

Non-Value-Added Costs

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What is kaizen costing?

Kaizen costing helps reduce costs by repeated use of 2 subcycles: 1) continuous

improvement, and 2) maintenance.

LO 3

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BENCHMARKING: Definition

LO 3

Uses “best practices” as the standard for evaluating activity performance with the goal of

becoming the best at performing activities & processes.

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ACTIVITY CAPACITY : Definition

LO 3

Activity drivers measure activity capacity, that is the

number of times an activity can be performed.

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CAPACITY VARIANCES

Unused capacity, the difference between activity availability & activity usage, needs management attention to reduce costs.

LO 3

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4 Describe activity-based customer & supplier costing.

LEARNING OBJECTIVE

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ACTIVITY-BASED CUSTOMER & SUPPLIER COSTING

By applying the approach of activity-based costing to customers and suppliers, managers can identify & reduce true cost of these relationships.

LO 4

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ACTIVITY-BASED CUSTOMER COSTING: An Example

Large Customer

10 Smaller Customers

Order-filling costs $ 4,000 $ 400,000

Sales force costs 10,000 210,000

ABC costing shows comparative cost of larger & smaller customers, assuming same number of units sold.

LO 4

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ACTIVITY-BASED SUPPLIER COSTING

Identifies costs other than price such asQualityReliabilityDelivery timeliness

for management to consider when selecting suppliers

LO 4

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THE END

CHAPTER 5