Cost Management Accounting & Control, Chapter 12
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
Chapter 12
Activity-Based Management
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
1
Study Objectives
1. Describe how activity-based management and
activity-based costing differ.
2. Define process value analysis.
3. Describe activity-based financial performance
measurement.
4. Discuss the implementation issues associated
with an activity-based management system.
5. Explain how activity-based management is a
form of responsibility accounting, and tell how it
differs from financial-based responsibility
accounting.
2
The Relationship of Activity-Based Costing
and Activity-Based Management
• Activity-based management (ABM) is a
– Systemwide, integrated approach
– Focuses management’s attention on activities
with the objectives of improving
• Customer value
• The profit achieved by providing this value
• ABC is the major source of information for
activity-based management.
3
The Relationship of ABC and ABM
4
Process Value Analysis
• Process value analysis
– Fundamental to activity-based responsibility
accounting
– Focuses on accountability for activities rather than
costs
– Emphasizes the maximization of systemwide
performance instead of individual performance
• Process value analysis is concerned with:
– Driver analysis
– Activity analysis
– Performance measurement
5
Process Value Analysis
• Driver analysis is the effort expended to identify the
factors that are the root causes of activity costs.
• Activity analysis is the process of identifying,
describing, and evaluating the activities an organization
performs.
• Activity analysis should produce four outcomes:
– What activities are performed.
– 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.
6
Process Value Analysis
• Value-added activities
– Necessary to remain in business
– By mandate (e.g., comply with SEC reporting
requirements)
– May contain nonessential actions that create
unnecessary cost.
• Nonvalue-added activities
– All activities other than those essential to
remain in business
7
Process Value Analysis
• Nonvalue-added activities
– Scheduling
• Uses resources to determine access to processes
– Moving
• Uses resources to move inventory among departments
– Waiting
• Uses resources while waiting for next process
– Inspecting
• Uses resources to ensure conformance to standards
– Storing
• Uses resources while goods are held in inventory
8
Process Value Analysis
• Kaizen costing: constant incremental
improvement, including cost reduction through
activity management
– Activity elimination
• Focus on eliminating nonvalue-added activities
– Activity selection
• Choose among sets of competing strategies
– Activity reduction
• Decrease time and resources required by an activity
– Activity sharing
• Use economies of scale to increase efficiency
9
Process Value Analysis
• Assessing activity performance
– Financial measures
– Nonfinancial measures
• Dimensions of performance assessment
– Efficiency
– Quality
– Time
10
Financial Measures of Activity
Efficiency
• Reveal the current level of efficiency and
the potential for increased efficiency
– Value- and nonvalue-added activity costs
– Trends in activity costs
– Kaizen standard setting
– Benchmarking
– Activity flexible budgeting
– Activity capacity management
11
Financial Measures of Activity
Efficiency
12
Financial Measures of Activity
Efficiency
Activity
Purchasing
Molding
Inspecting
Grinding
Activity Driver
SQAQ SP
Purchasing hours 20,00023,000$20
Molding hours
30,00034,00012
Inspection hours
06,000 15
Number of units
05,000 6
Value-added
standards call for
elimination
13
Financial Measures of Activity
Efficiency
14
Financial Measures of Activity
Efficiency
15
Financial Measures of Activity
Efficiency
• 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
• Kaizen (continuous improvement) cycle
• Maintenance cycle
16
Financial Measures of Activity
Efficiency
17
Financial Measures of Activity
Efficiency
• Benchmarking
– Uses best practices as the standard for
evaluating activity performance
• Internal benchmarking
– Benchmarking against the best internal
performance
• External benchmarking
– Comparison with others outside the
organization
18
Financial Measures of Activity
Efficiency
• Activity flexible budgeting
– Predicted activity costs reflect activity output
changes
– Multiple cost drivers require multiple flexible
budget formulas
– Describe both flexible and committed
resources
19
Financial Measures of Activity
Efficiency
20
Financial Measures of Activity
Efficiency
21
Financial Measures of Activity
Efficiency
22
Financial Measures of Activity
Efficiency
23
Financial Measures of Activity
Efficiency
24
Financial Measures Of Activity
Efficiency
• Activity capacity
– The number of times an activity can be
performed
• Activity capacity management
– Measured by activity drivers
– Capacity variances
• Activity volume variance
• Unused capacity variance
25
Financial Measures of Activity
Efficiency
26
Implementing ABM
(continued on next slide)
27
Implementing ABM
(continued from previous slide)
28
Implementing ABM
1.
2.
3.
4.
5.
Systems planning provides the justification for
implementing ABM and address the following issues:
The purpose and objectives of the ABM system.
The organization’s current and desired competitive
position.
The organization’s business processes and product mix.
The timeline, assigned responsibilities, and resources
required for implementation.
The ability of the organization to implement, learn, and
use new information.
29
Implementing ABM
• Why ABM implementations fail
– Lack of support of higher-level management.
– Failure to maintain support from higher-level
management.
– Resistance to change.
– Failure to integrate the new system.
30
Financial-Based vs Activity-Based
Responsibility Accounting
31
Financial-Based vs Activity-Based
Responsibility Accounting
• Assigning responsibility
– Financial-based
• Focuses on functional organizational units and
individuals
• Emphasis on optimum results at the local level
– Activity-based
• Focuses on processes and teams
• Emphasis on systemwide optimization
32
Financial-Based vs Activity-Based
Responsibility Accounting
33
Financial-Based vs Activity-Based
Responsibility Accounting
• Establishing performance measures
– Financial-based
• Budgeting and standard costing
• Measures are objective and financial; stable over
time
– Activity-based
• Measures are process-orientated; structured to
support change
34
Financial-Based vs Activity-Based
Responsibility Accounting
35
Financial-Based vs Activity-Based
Responsibility Accounting
• Evaluating performance
– Financial-based
• Compare actual outcomes with budgeted
outcomes
– Activity-based
• Financial perspective
• Other critical dimensions: time, quality, efficiency
36
Financial-Based vs Activity-Based
Responsibility Accounting
37
Financial-Based vs Activity-Based
Responsibility Accounting
• Assigning rewards
– Both systems
• Management policy and discretion
– Financial-based
• Individual achieves or beats budget standards
• Profit-sharing (individual)
– Activity-based
• Multidimensional measurement and reward
• Gainsharing (group-based)
38
Financial-Based vs Activity-Based
Responsibility Accounting
39
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
End Chapter 12
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
40
Accounting & Control
Hansen▪Mowen▪Guan
Chapter 12
Activity-Based Management
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
1
Study Objectives
1. Describe how activity-based management and
activity-based costing differ.
2. Define process value analysis.
3. Describe activity-based financial performance
measurement.
4. Discuss the implementation issues associated
with an activity-based management system.
5. Explain how activity-based management is a
form of responsibility accounting, and tell how it
differs from financial-based responsibility
accounting.
2
The Relationship of Activity-Based Costing
and Activity-Based Management
• Activity-based management (ABM) is a
– Systemwide, integrated approach
– Focuses management’s attention on activities
with the objectives of improving
• Customer value
• The profit achieved by providing this value
• ABC is the major source of information for
activity-based management.
3
The Relationship of ABC and ABM
4
Process Value Analysis
• Process value analysis
– Fundamental to activity-based responsibility
accounting
– Focuses on accountability for activities rather than
costs
– Emphasizes the maximization of systemwide
performance instead of individual performance
• Process value analysis is concerned with:
– Driver analysis
– Activity analysis
– Performance measurement
5
Process Value Analysis
• Driver analysis is the effort expended to identify the
factors that are the root causes of activity costs.
• Activity analysis is the process of identifying,
describing, and evaluating the activities an organization
performs.
• Activity analysis should produce four outcomes:
– What activities are performed.
– 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.
6
Process Value Analysis
• Value-added activities
– Necessary to remain in business
– By mandate (e.g., comply with SEC reporting
requirements)
– May contain nonessential actions that create
unnecessary cost.
• Nonvalue-added activities
– All activities other than those essential to
remain in business
7
Process Value Analysis
• Nonvalue-added activities
– Scheduling
• Uses resources to determine access to processes
– Moving
• Uses resources to move inventory among departments
– Waiting
• Uses resources while waiting for next process
– Inspecting
• Uses resources to ensure conformance to standards
– Storing
• Uses resources while goods are held in inventory
8
Process Value Analysis
• Kaizen costing: constant incremental
improvement, including cost reduction through
activity management
– Activity elimination
• Focus on eliminating nonvalue-added activities
– Activity selection
• Choose among sets of competing strategies
– Activity reduction
• Decrease time and resources required by an activity
– Activity sharing
• Use economies of scale to increase efficiency
9
Process Value Analysis
• Assessing activity performance
– Financial measures
– Nonfinancial measures
• Dimensions of performance assessment
– Efficiency
– Quality
– Time
10
Financial Measures of Activity
Efficiency
• Reveal the current level of efficiency and
the potential for increased efficiency
– Value- and nonvalue-added activity costs
– Trends in activity costs
– Kaizen standard setting
– Benchmarking
– Activity flexible budgeting
– Activity capacity management
11
Financial Measures of Activity
Efficiency
12
Financial Measures of Activity
Efficiency
Activity
Purchasing
Molding
Inspecting
Grinding
Activity Driver
SQAQ SP
Purchasing hours 20,00023,000$20
Molding hours
30,00034,00012
Inspection hours
06,000 15
Number of units
05,000 6
Value-added
standards call for
elimination
13
Financial Measures of Activity
Efficiency
14
Financial Measures of Activity
Efficiency
15
Financial Measures of Activity
Efficiency
• 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
• Kaizen (continuous improvement) cycle
• Maintenance cycle
16
Financial Measures of Activity
Efficiency
17
Financial Measures of Activity
Efficiency
• Benchmarking
– Uses best practices as the standard for
evaluating activity performance
• Internal benchmarking
– Benchmarking against the best internal
performance
• External benchmarking
– Comparison with others outside the
organization
18
Financial Measures of Activity
Efficiency
• Activity flexible budgeting
– Predicted activity costs reflect activity output
changes
– Multiple cost drivers require multiple flexible
budget formulas
– Describe both flexible and committed
resources
19
Financial Measures of Activity
Efficiency
20
Financial Measures of Activity
Efficiency
21
Financial Measures of Activity
Efficiency
22
Financial Measures of Activity
Efficiency
23
Financial Measures of Activity
Efficiency
24
Financial Measures Of Activity
Efficiency
• Activity capacity
– The number of times an activity can be
performed
• Activity capacity management
– Measured by activity drivers
– Capacity variances
• Activity volume variance
• Unused capacity variance
25
Financial Measures of Activity
Efficiency
26
Implementing ABM
(continued on next slide)
27
Implementing ABM
(continued from previous slide)
28
Implementing ABM
1.
2.
3.
4.
5.
Systems planning provides the justification for
implementing ABM and address the following issues:
The purpose and objectives of the ABM system.
The organization’s current and desired competitive
position.
The organization’s business processes and product mix.
The timeline, assigned responsibilities, and resources
required for implementation.
The ability of the organization to implement, learn, and
use new information.
29
Implementing ABM
• Why ABM implementations fail
– Lack of support of higher-level management.
– Failure to maintain support from higher-level
management.
– Resistance to change.
– Failure to integrate the new system.
30
Financial-Based vs Activity-Based
Responsibility Accounting
31
Financial-Based vs Activity-Based
Responsibility Accounting
• Assigning responsibility
– Financial-based
• Focuses on functional organizational units and
individuals
• Emphasis on optimum results at the local level
– Activity-based
• Focuses on processes and teams
• Emphasis on systemwide optimization
32
Financial-Based vs Activity-Based
Responsibility Accounting
33
Financial-Based vs Activity-Based
Responsibility Accounting
• Establishing performance measures
– Financial-based
• Budgeting and standard costing
• Measures are objective and financial; stable over
time
– Activity-based
• Measures are process-orientated; structured to
support change
34
Financial-Based vs Activity-Based
Responsibility Accounting
35
Financial-Based vs Activity-Based
Responsibility Accounting
• Evaluating performance
– Financial-based
• Compare actual outcomes with budgeted
outcomes
– Activity-based
• Financial perspective
• Other critical dimensions: time, quality, efficiency
36
Financial-Based vs Activity-Based
Responsibility Accounting
37
Financial-Based vs Activity-Based
Responsibility Accounting
• Assigning rewards
– Both systems
• Management policy and discretion
– Financial-based
• Individual achieves or beats budget standards
• Profit-sharing (individual)
– Activity-based
• Multidimensional measurement and reward
• Gainsharing (group-based)
38
Financial-Based vs Activity-Based
Responsibility Accounting
39
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
End Chapter 12
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
40