topic 7b activity based management sem 2 1516

Topic 4bActivity-Based Management

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This topics covers the following:

Revision of Activity Based Costing – the four steps

ABC and target costing Value added and non value added activity

analysis Implementation of ABC and ABM

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?? ABM adds:ABM adds:

•Identification of value-added and non-value-added activities

Activity-Based Management

4 Basic Steps4 Basic Steps Identify & classify the

activities related to the company’s products or services.

Estimate the costs associated with each activity.

Calculate a cost-driver rate for each activity.

Assign activity costs to products using the cost-driver rate.

•Identifies the customer perceived value of each activity •Identifies opportunities to enhance value-added activities and reduce or eliminate non-value-added activities

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1. Identify and measure the different levels of resource spending

2. Measure the costs of individual activities

3. Identify cost-driver bases and measure activity cost-driver rates

4. Use cost-driver rates to assign activity costs to products, jobs, services, and projects by multiplying the

use of cost driver base(s) by the cost driver rates

5. Analyze the profitability of products usingABC unit-level and full costing.

The Steps Of ABC

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Activity-Based Management (ABM)

Evaluates the Evaluates the costs and values costs and values

of process of process activities . . . activities . . .

. . . To identify . . . To identify opportunities to opportunities to

improve improve efficiency.efficiency.

Activity-Based Activity-Based Costing Costing

Valued-Added Valued-Added Analysis Analysis

Process Process Improvements, Improvements,

Customer Value, & Customer Value, & Reduced Costs Reduced Costs

= = + +

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TargetCost =market

price lessreturn on

sale

Megaburger Promotional Toys

Combining ABC And Target Costing

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ABC-Target Costing Analysis

By comparing By comparing the target cost to the target cost to

the currently the currently feasible cost, we feasible cost, we can determine can determine

the amount that the amount that cost needs to be cost needs to be

reduced.reduced.

Exh.5.2

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ActivitiesActivities

Create outcomes and consume resources

VALUE-ADDED ACTIVITIESenhance the value of products

and services in the eyes of the customer while meetingthe goals of the organization

NON-VALUE-ADDED ACTIVITIES

do not contribute to customerperceived value

The Importance Of Customer Value

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Why do organizations have incentivesto eliminate non-value added activities?

Competitors are constantly striving

to create more value for customers at

lower cost

The organization can apply the freed- up resources to value-added activities or

distribute them to the employees of the

organization.Competition can appear quickly

Non-value Added Activities

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Most Likely Sources of Non-Value-Added Activities

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If the answer is “yes” to both it is

value-added.

If the answer is “no” to

both or either it is non-

value-added.

YES YESNO NO

The test for value added activities

Identifying Value-Added Activities

“Would an external customer encourage

the organization to do more of the activity?”

“Would the organization be more likely to reach its goal by

performing that activity?”

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VALUE-ADDED

NON-VALUE-ADDED

Rate on a scale of 1 to 5Rate on a scale of 1 to 5

Necessary Activities

TechnologicalRequirements

PolicyRequirements

RegulatoryRequirements

5 4 3 2 1

Neither value-added nor non-value-added

How Should An Organization Measure Value-Added?

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Everyone’s knowledge is limited Everyone is potentially biased in

his or her response

Use a team approach

Who Should Perform The Measurement Activity?

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Twin objectivesof

ABM

Identify non-value-addedactivities to be eliminated

or reduced

Identify value-addedactivities to be enhanced

Redesign processes to eliminate wasteful spending on non-value-added activities

Tasks Required by Activity-Based Management

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5 (highest) $100 3.3%4 0 0.0%3 1,200 40.0%2 700 23.3%1 (lowest) 1,000 33.3%Total $3,000 100.0%

By comparing the cost to the value of the task, we can identify oversupplied non-value-added activities and undersupplied value-added activities. By focusing on those low-value tasks with high

resource allocation, we can improve efficiency.

Oversupplied non-value-added

activities

Sorting Activities By CostAnd Value

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Ask “Why?” for each step in the process.

Why#1: Appearance and product function requires removal of the excessWhy#2: Under high-injection pressure, plastic leaks from the edges of the mold Why#3: High pressure is required to mold the products properlyWhy#4: The design of the molds permits leakageWhy#5: The molds are based on old designs

Why do employees need to trim excess plastic from molded

products?

SOLUTION: Rework or replace old molds with improved molds to eliminate

the need for trimming and recycling.

Identifying Opportunities For Process Improvement

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Why are we spending so much time on non-value-added record keeping and

the correction of recording errors?

SOLUTION: Install a bar-codingsystem to mark and track all

orders electronically

A bar-coding system creates aunique bar code for each order

and allows the company to mark and track all orders electronically

Ask “Why?” for each step in the process.


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After process After process improvements, improvements,

total elapsed total elapsed time has been time has been

reduced to reduced to 82.2 minutes.82.2 minutes.

If we assume a If we assume a cost of $10 per cost of $10 per hour, what is hour, what is

the cost the cost savings?savings?


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Time Saved:Time Saved:286 min.286 min.

- 82.2 min.- 82.2 min.203.8 min.203.8 min.

÷ ÷ 60 min/hr60 min/hr3.397 hrs.3.397 hrs.

Cost Savings:Cost Savings:3.397 hrs.3.397 hrs.× $10/hr.× $10/hr.$33.97 $33.97


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The Focus ofABC

The Focus ofABM

Developing improved product or service costs given current processes

Identifying opportunities for improving processes

Consider cost-benefits

Implementation Of Activity-Based Costing & Management

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What Organizations Adopt ABC and ABM?

Companies facing price competition

Companies producing many different, complex products from common

facilities

Implementation Of Activity-Based Costing And Management

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What is the scope of the ABC or ABM project?

Pilot Project OrganizationwideSystem

Can You Be Sure That ABCAnd ABM Will Be Successful?

What is a “pilot project”?

A project of limited scope that is intended

to be a small-scale model of an

organizational system.

Why use a “pilot project”?

Anticipate the linkages across departments,

groups and processes. Anticipate the data

gathering and reporting requirements.

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What resources are necessary?

Management Commitment

Personnel and Time

Technology

Begin with existing

commercialsoftware

Significant projects will require a three-

to four-person, cross-functional team at least four to six months of full-time effort

Educate top management

as to cost/benefits


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How can you anticipate and overcome resistance to change?

Prevent or Minimize Resistance by:

Effects of Culture

Education and Training

Incentives that Encourage and Reward Change

Widespread Sponsorship and Participation

Be Sensitive to Differences in National Cultures


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ABC and ABM require information that is not normally availablefrom an organization’s information systems

This information can

be generated by:Observation

Interview

Survey


How do you gather information?

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How Should you Perform the Analysis and Make Recommendations?


Though top managers ultimately have the responsibility for authorizing and effecting major

changes, the analysis team is best prepared to analyze the data and make recommendations.

The team is ultimately familiar with the data, its strengths and weaknesses.

Empowering and Requiring the Team to Make Recommendations gives the Control and

Accountability for the Entire Project

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Activity based management

Value added activityValue added activity

Target costingTarget costing Non value added Non value added sourcessources

Top downTop downapproachapproach

Interview approachInterview approach

Recycling Recycling approachapproach

Topic 2Topic 2ImplementationImplementationproblemsproblems

Activity Based CostingActivity Based Costing

Process Process improvementimprovement

topic 7b activity based management sem 2 1516

Economy & Finance