topic 8-lecture-abm-2008 revisi maret 2014

8/11/2019 Topic 8-Lecture-ABM-2008 Revisi Maret 2014

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P. 1

Process Control and Activity

Based Management Monitoring Systems

Applications of ABC

The first applications of ABC were in productcosting and profi t measurement of products and

customers (discussed earlier).

ABC could become an important tool in other areas

- such as Process Control or Activity BasedManagement (ABM).



P. 2



P. 3

Definitions and Objectives

"Process Control" is the short-term control of

operational processes within an organisation.Its function is to measure processes' outcomes and

to take corrective action when the measured

outcomes deviate from those desired.

Usually "process control" refers to the physicalmanufactur ing process.



P. 4

Process control in a broader sense - is known as

"Activity Based Management", e.g.. to manage the

activities of:

design engineering

Personnel Administration

purchasing

Promotionprocess planning

Repairs and Maintenance

production planning

Legal Affairs



P. 5

Measuring the Performance of a Process

Ef f iciency or Productivity:

This can be measured in terms of output unitsdivided by input quantity (for example, labour

hours).

The result is the "output-input ratio" - and is

called "productivity" or "efficiency".Price Relationship or Recovery: This is the ratio of

output prices to input prices

Overall Effectiveness: This is the monetary value of

all products sold, divided by the value of allresources consumed



P. 6

Overall Effectiveness =Output quantities

Input quantities

xOutput prices

Input prices

(efficiency or productivity) (price relationship or price recovery)

(For multiple inputs and/or outputs, some

kind of mathematical weighting technique isneeded.)



P. 7

The Measurement Phase of Process Control

This resembles the control of "guided missiles" or industrial robots, rather than accounting.

Modern machine tools have gauges which canmeasure every individual item in a productionbatch - with pinpoint accuracy.

Even after the production stage, the flow of

products along the desired channels is very easyto measure due to:

– Bar Coding

– Electronic Scales and escort memories

– Laser memories – Relational-Data Bases etc.



P. 8

Monitoring Indirect Departments (i.e. ActivityBased Management)

White-collar employees have not received nearlyas much attention as production workers -although in modern industrial settings theyaccount for an increasing proportion of theoverhead cost .

The reason is that monitoring of "indirectdepartments", which embrace (amongst others)the knowledge workers, is more difficult.

"Input" can be measured fairly well with thehelp of "working-time" registration, e.g.:

– time cards (becoming very obsolete)

– cost invoices

"Output" is the main problem



P. 9

Example: Sales Department

TRADITIONAL VIEW

Salaries

Benefits

Travel

Car

Occupancy

Telephone

4,000

400

700

300

300

500

6,500



P. 10

Example: Sales Department

TRADITIONAL VIEW

Salaries

Benefits

Travel

Car

Occupancy

Telephone

4,000

400

700

300

300

500

6,500

ACTIVITY BASED VIEW

Visit Customers

Travel

Process Orders

Check prices, delivery

Chase Factory

Meetings

1,400

1,200

700

800

800

1,600

6,500



P. 11

ABC provides a new approach to implementing changein white collar departments (WCDs).

See : Traditional objectives of White collar Heads of Dept

versus Activity Based Budgeting (See 8CN – 8)

The key innovation is to use Cost Dr ivers as anapproximation the output of the various departments,e.g.: - number of routings

– number of drawings – number of purchase orders

This is quite natural, since cost drivers explain why acertain activity will consume a certain amount ofresources.

However, these do not include information about:

– the quality of the output, or

– the difficulties inherent in the task.SEE VIDEO OF ABM PART I



P. 12

Activities

Resources

Cost Objects

PerformanceMeasures

Cost Drivers

Activity Based Costing(Cost Allocation View)

Activities

Based

Management

(Process View)



P. 13

ABM in a Telco – SEE FIRST VIDEO ABM PART I I : ACTIVITY ANALYSIS 15”

PURCHASING DEPARTMENT

Activi t ies

%

Time

Annual

Cost $

Unit

Cost $

PROCESS REQUISITIONS 10,000 re . .a.

Clarify details

Pre are s ec if ic atio ns

Obtain quotes

Vendor ueries

Negotiate & s elect vendo r

Generate ord ers

Generate amended o rders

EXPEDITE ORDERS (1,000 orders)

Vendor ueries

Chase late orders

Amend orders

Urgent supply/stockouts

PROCESS RECEIPTS (15,000 receip ts)

Check of oods received

F/U shor t deliveries F/U back orders

Cancel orders

Pre are re o rt s and adm in is tr at ion

TOTAL

Com leted re u is it ions 9,500

13

2

1

3

1

5

11

36

6

4

9

10

29

1

8 2

1

23

35

100

16,430

2,530

1,265

3,790

1,265

6,320

13,900

45,500

7,590

5,055

11,375

12,640

36,660

1,265

10,110 2,530

1,265

29,070

44,240

126,400

4.50

36.66

2.95

13.30



P. 14

Value-Adding/Non-Value Adding Work

13% of time spent clarifying details $16,430

11% of time generating amended orders $13,900

29% of time expediting orders $36,660

53% of time wasted $66,990

23% of time spent on administration $29,070

Actual Value Added Work:

Specifications 2% $2,530

Obtain quotes 1% $1,265

Negotiate vendors 1% $1,265

Generate orders 5% $6,320

Check goods received 1% $1,26510% $12,645



P. 15

ABM in a Telco Service Unit

Improved product data can be made available

Product 1 Product 1

Labour

Materials

Overhead

TOTAL

450

100

100

650

Act ivat ions

Network Maintenance

Product Design

Service Changes

Custom er Quer ies

TOTAL

185

175

150

40

100

650

Process Improvements - Activation

– Determined 35% of activations were reserviced within 7days

– 45% of time was idle time

– Activation costs between regions fluctuated by up to 35%

– Best internal unit activation cost was within 5% of best inclass



P. 16

SEE VIDEO ABM PART I : 20”

THE APPLICATION OF ABM AT :

- BC TEL

- KANTHAL



P. 17

Activity Based Budgeting

Traditional budgeting implies:

– level by level allocation of overhead costs fromsupporting cost centres to production cost centres

(using a volume related allocation base).

– "common backpacks" carried by production cost

centre are often a source of discontent. Activity Based Budgeting (ABB) is an extension of

Activity Based Management (ABM) undertaken to

improve the planning and effectiveness of White-

Collar Departments

Contoh pengembangan ABB : Reading 8 B : Linking Strategy Based Costing & Innovation Based Budgeting

Reading 8D dan 8 E: Beyond Budgeting



P. 18

Number of

customers

Number

orders

Number

export

orders

Number of

despatches

Price list

and sales

literature

sustaining cost

Department

sustaining

cost

Total

Management salary

Clerical salaries

OvertimeStationery and

consumables

IT costs

Other costs

-

30

-

-

8

3

-

80

-

8

12

4

-

70

10

3

4

2

-

40

15

4

8

6

10

20

-

30

-

7

30

-

-

-

-

10

40

240

25

45

32

32

Total $41 $104 $89 $73 $67 $40 $414

Volume of activityCost per unit

activity

650

$63

2300

$45

500

$178

6000

$12

-

$67,000

-

$40,000

Activity Cost Budget for a Sales Order Department (Figures in $000s)



P. 19

Activity Based Cost Variance Analysis

Consider, for example, a whi te-col lar department like purchasing, and how it relates to one product

via one cost driver.

Assume that the values of the following variablesare known:

– The budgeted and actual costs of the activity

(the total cost of running the purchasingdepartment).

– The budgeted and actual number ofoccurrences of the cost driver (the number ofpurchase orders).

– The budgeted and actual sales volume (number of, say, refrigerators sold).

These three variables are the basis of aquantitative analysis.



P. 20

Budget Ab =

$30,000Actual Aa =$28,000



P. 21

Budget Ab =

$30,000Actual Aa =$28,000

Nb = 1,000eventsNa = 880events



P. 22

Ub = 10,000units

Ua = 11,000units

Budget Ab =

$30,000Actual Aa =$28,000

Nb = 1,000eventsNa = 880events



P. 23

Traditional var iance analysis will use volume to "flex"

the budget to "standard cost allowed for actual

output". Thus: – standard cost allowed per unit = $30,000/10,000 = $3

p.u.

– actual cost per unit = $28,000/11,000 = $2.55 p.u.

– Thus, the variance would be considered "favorable".

In Activity Based Cost Variance Analysis the cost-

driver would be used to "flex" the budget. Thus:

– standard cost allowed per unit = $30,000/1,000 = $30

p.unit of activity

– actual cost allowed for actual output = $28,000/880 =$31.82 p.u.

– The productivity of the activity is thus lower than the

target - i.e. "unfavorable".



P. 24

Responsibility Accounting" under ABM

As one can see, the budgeted number of cost-

driver events was too high (1,000 vs. 880) The estimation of the budgeted amount of cost

drivers that will be required is the responsibility

of the product manager (refrigerator line

manager) who will base this estimation on thenumber of parts that will be required to

manufacture the refrigerators.

The product manager has control over the

number of cost drivers (purchasing orders)

required, and can reduce this number, e.g. by

reducing the number of parts used, if this is

feasible.



P. 25

Therefore, based on the predicted workload, if toomany purchasing people are hired, say, this is not thefault of the purchasing manager, but the manager

who forecasts the demands that were going to bemade of the purchasing department (i.e., the productmanager).

The head of a service (purchasing) cost center has toonly:

– control and record the level of the activity andobserve the number of cost drivers.

– record idle time (over capacity) in his or herdepartment.

Otherwise, he or she might be blamed for having aproductivity decrease when productivity has, in fact,increased (i.e., spent $28,000 instead of $30,000).



P. 26

Cost Follow-up of a Customer Order Under ABM

Example: A customer orders a product consisting of400 components. Most of the components are

standard parts, but 20 require new drawings becauseof minor changes. Two of the components have neverbeen manufactured and cannot be pur chased, leavingthe R & D department to design and develop them .The factory estimates the number of manufacturingorders at 120, machine hours at 300 and directlabour hours at 200. The mater ial value is forecast at$20,000, and it is necessary to order 50 dif ferentcomponents from subcontractors. F inall y, thewarehouse department estimates the number ofissues (parts taken out f rom the inventory) at 250.The number of cost-driver events is estimated asshown in the figure.



P. 27

Cost Driver Estimates

Type of cost A. B. Cost Estimate

Number of cost-

drivers

$ each Total

Direct material

Material overhead for

purchased order

Material overhead forstock issues

Direct labour

Machine hours

Production planning

Design and process

planning

Part numbermaintenance

R&D

Customer order

processing

-

50 products

250 issues

200 hours

300 hours

120 orders

20 new drawings

400 products

2 new parts

1 customer order

-

70

12

90

80

250

500

20

2,500

8,000

20,000

3,500

3,000

18,000

24,000

30,000

10,000

8,000

5,000

8,000

Total - - 129,500



P. 28

Let us assume that the “actual cost” information

was\as follows:

– Direct Material Costs: $ 19,500 – Direct Labour Costs: $17,100

– Direct Labour Hours: 190 hours

Traditional accounting „cost follow-up‟ would

have shown that: COSTESTIMATE

ACTUAL/ALLOCATED

VARIANCE

Direct Materials

Direct Labour

Allocated O/H‟s (per DLH)

$20,000

$18,000

$91,500

$129.500

$19,500

$17,100

*$86,925

$123.525

+ 500

+ 900

+ 4575

+5975

* ÷ =



P. 29

Cost Driver Actuals

Type of cost A. B. Cost Estimate Actual Costs

Number of cost-

drivers

$ each Total Number of

cost-drivers

Total

Direct material

Material overhead forpurchased order

Material overhead forstock issues

Direct labour

Machine hoursProduction planning

Design and process

planning

Part numbermaintenance

R&D

Customer order

processing

-

50 products

250 issues

200 hours

300 hours120 orders

20 new drawings

400 products

2 new parts

1 customer order

-

70

12

90

80250

500

20

2,500

8,000

20,000

3,500

3,000

18,000

24,00030,000

10,000

8,000

5,000

8,000

-

45

260

190

310135

28

400

2

1

19,500

17,100

Total - - 129,500 -



P. 30

Activity-Based Cost Follow-up

ORDER-COST VARIANCE

Type of cost A. B. Cost Estimate A. B. Cost Follow-up Variance

Number of cost-drivers

$ each Total Number of cost-

drivers

Total

Direct materialMaterial overhead for purchased orderMaterial overhead for stock issuesDirect labourMachine hoursProduction planningDesign and process planningPart number maintenance

R&DCustomer order processing

-

50 products

250 issues200 hours300 hours

120 orders

20 new drawings

400 products

2 new parts

1 customer order

-

70

129080

250

500

20

2,500

8,000

20,000

3,500

3,00018,00024,00030,000

10,000

8,000

5,000

8,000

-

45

260190310135

28

400

2

1

19,500

3,150

3,12017,10024,30033,750

14,000

8,000

5,000

8,000

500

350

-120900

-800-3,750

-4,000

0

0

0

Total - - 129,500 - 136,420 -6,900



P. 31

The ABM methods supplies a prompt warning :

management is being overly optimistic in its assessment of

new drawings and manufacturing orders when issuing

quotations for this group of products

By using conventional calculation methods, management

would have discovered negative differences at the end ofthe budget period, but would have hav only very limited

capacity to track the real problems (such as letting the

salesman and designers create too many part numbers on

a fixed price customer order)



P. 32

Feedback systems under ABM The costing system’s business control aspects are extremely

important. Feedback is required concerning non-financialvariables like new drawings, stock issues, etc.

This feedback allows a variety of corrective actions to be

taken

Thus, per iodical activity-based budgeting combined with" real-time" activity -cost fol low-up offers an excellent

instrument to measure the monetary consequences of

making a mul ti tude of small decisions , even in whi te-col lar

support department See paper : 8 F : Mgr reaction to unfavorable budget

variance



P. 33

Other illustration of application ABM in service dept :

Reading 8 C : Managing Shared Services with ABM

Figure 1 and 2

Other development :

Reading 8 A : Measurement unused capacity in timedriven ABC



P. 34

Activity Based Management: The Issues

What is the Key Performance Variables that should

be Measured (Top-down or Bottom-up?) (Top ofCamel Example)

How Frequent must Reports Be?

The Problems with Monthly Reporting (the Top-

Down Approach)What about Timeliness vs Accuracy?



P. 35


What is the Key Performance Variables that should be

Measured

- Process control is more concerned with the

„technician level‟ parts of a company than with the

„strategic level‟ whole.

- In contrast to control systems imposed from the topdown by accountancy based method (most often

using financial measures such as ROI, ROA, etc –

Local process control and performance

measurement systems have to be extremely varied



P. 36


How Frequent must Reports Be?

The Problems with Monthly Reporting (the Top-

Down Approach)

– too late, inappropriate measure, valueless

Every activity should be analyzed according to

its informational needs (the Bottom up

approach)

- in production : repetitive…daily

- in R & D : long periods

See „The Octopus Syndrome in Inf Processing‟ 8CN-15



P. 37

What about Timeliness vs Accuracy?

A monthly report 90 % accurate on the last day of a month may be more

useful for short term decision making purposes than a 99.9 %

accurate report on the 15th

of the next month. However the latterreport may not satisfy accountants with their need for auditable data

– DIFFERENT COSTS FOR DIFFERENT PURPOSES

Benef it

>

<

Accuracy

Timeliness

Accuracy-Timelines Trade-off

Benefit



P. 38

What Level of Detail is Required?

The responsibility for the design of process control systems

(Top down or Bottom up)

Executive Information System : an example of thedifferent usage of the report and indicators at each level



P. 39

Executive Information Systems



P. 40

CORPORATE

PRODUCTIONMANAGER

PLANTMANAGER

DEPARTMENT

SUPERVISOR

PROCESSDRIVERS

Returnon Assets

InventoryDays

Output /Equipment $

Output /Square feetOccupied

ManufactureCycle Time

Machine

Down time

DefectiveAssembly

Finished GoodsInventory Days

DaysVendor

Lead Time

$ Good Output

/ Total Output

# UnplannedSchedule

changes

PartsAvailability

Wait onQC

No ManpowerPowerFailure

Chang coverTimes

Critical Success Factor - Resource Management

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