MANAGEMENT ACCOUNTING

AGUS SISWANDI
01153056

PPT 10 -1
Chapter Ten

Activity- and Strategic-Based

Responsibility Accounting

PPT 10 -2
 Learning Objectives

 Compare and contrast functional-based,

activity-based, and strategic-based
responsibility accounting systems.
 Explain process value analysis.

 Describe activity performance

measurement.
 Explain the basic features of the Balanced
Scorecard.
PPT 10 -3
 Responsibility Accounting Model

The responsibility accounting model is defined by

four essential elements:
 assigning responsibility
 establishing performance measures or benchmarks
 evaluating performance
 assigning rewards

PPT 10 -4
 Types of Responsibility Accounting

Management accounting offers the following three

types of responsibility accounting systems.
 Functional-based
 Activity-based
 Strategic-based

PPT 10 -5
 Functional-Based Responsibility
Accounting System

A functional-based responsibility accounting system

assigns responsibility to organizational units and
expresses performance measures in financial terms.
It is the responsibility accounting system that was
developed when most firms were operating in relatively
stable environments.

PPT 10 -6
 Activity-Based Responsibility
Accounting System

An activity-based responsibility accounting system

assigns responsibility to processes and uses both
financial and nonfinancial measures of performance.
It is the responsibility accounting system developed for
those firms operating in continuous improvement
environments.

PPT 10 -7
 Elements of a Functional-Based
Responsibility Accounting System
Individual Organizational
in Charge Unit
Responsibility
is Defined
Operating Financial
Efficiency Outcomes

Unit Standard
Budgets Performance Measures Costing
are Established

Static Currently
Standards Attainable
PPT 10 -8
 Elements of a Functional-Based
Responsibility Accounting System
Financial Controllable
Efficiency Costs
Performance
is Measured
Actual versus Financial
Standard Measures

Promotions Bonuses
Individuals are Rewarded
Based on
Financial Performance
Profit Salary
Sharing Increases
PPT 10 -9
 Elements of an Activity-Based
Responsibility Accounting System
Team Process

Responsibility
is Defined
Value Financial
Chain

Optimal Dynamic
Performance Measures
are Established

Process Value-
Oriented Added
PPT 10 -10
 Elements of an Activity-Based
Responsibility Accounting System
Time Quality
Reductions Improvement
Performance
is Measured
Cost Trend
Reductions Measures

Promotions Bonuses
Individuals are Rewarded
Based on Multidimensional
Performance
Gain- Salary
sharing Increases
PPT 10 -11
 Strategic-Based Responsibility
Accounting System
A strategic-based responsibility accounting system
(Balanced Scorecard) translates the mission and
strategy of an organization into operational
objectives and measures for four different
perspectives:
The financial perspective
The customer perspective
The process perspective
The infrastructure (learning and growth) perspective
PPT 10 -12
 Elements of a Strategic-Based
Responsibility Accounting System
Financial Customer

Responsibility
is Defined
Process Infrastructure

Communicate Balanced
Strategy Performance Measures Measures
are Established

Alignment of Link to
Objectives Strategy
PPT 10 -13
 Elements of a Strategic-Based
Responsibility Accounting System
Financial Customer
Measures Measures
Performance
is Measured
Process Infrastructure
Measures Measures

Promotions Bonuses
Individuals are Rewarded
Based on Multidimensional
Performance
Gain- Salary
sharing Increases
PPT 10 -14
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 10 -15
Activity-Based Management Model
Cost Dimension

Resources
Process Dimension

Driver Analysis Activities Performance Analysis

Why? What? How Well?

Products and
Customers
PPT 10 -16
 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 10 -17
 Activity Analysis

Activity analysis should produce four outcomes:

What activities are done?
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 10 -18
 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 10 -19
 Nonvalue-Added Activities

Non-Value-Added Activities are activities that add cost and impede

performance.

Scheduling
Moving
Waiting
Examples Inspecting
Storing

PPT 10 -20
 Activity Analysis

Activity Analysis Can Reduce Costs in Four Ways:

Activity elimination
Activity selection
Activity reduction
Activity sharing

PPT 10 -21
Activity Performance Measurement

Three Dimensions of Activity Performance

 Efficiency

 Quality

 Time

PPT 10 -22
 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
Life-cycle costing

PPT 10 -23
Value- and Nonvalue-Added 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 10 -24
 Value- and Nonvalue-Added
Cost Report

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
======== ======== ========

PPT 10 -25
Trend Report: Nonvalue-Added Costs

Nonvalue-Added Costs
Activity 2000 2001 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
======== ======== ========

PPT 10 -26
 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 sub-cycles:
(1) the kaizen or continuous improvement
cycle, and
(2) the maintenance cycle.

PPT 10 -27
Improving Performance Through
Benchmarking

Organization A Share
Organization B
Cost of Processing a Information
Cost of Processing a
Purchase Order is Purchase Order is
$20 $15

How do we improve?

PPT 10 -28
 Activity Capacity Management

Activity capacity is the

number of times an
activity can be
performed.

PPT 10 -29
 Activity Capacity Variances

AQ = Activity capacity acquired (practical capacity)

SQ = Activity capacity that should be used
AU = Actual usage of the activity
SP = Fixed activity rate

SP x SQ SP x AQ SP x AU
$2,000 x 0 $2,000 x 60 $2000 x 40
$0 $120,000 $80,000
Activity Unused
Volume Variance Capacity Variance
$120,000 U $40,000 F

PPT 10 -30
Life-Cycle Cost Commitment Curve
Cost Commitment Curve
Life Cycle
Cost %

100
90
80
70
90 percent of life-cycle
60
costs are committed at this
50
point
40
30
20
10

Planning Design Testing Production Logistics PPT 10 -31

 Target Costing

A target cost is the difference between the sales price

needed to capture a predetermined market share
and the desired per-unit profit.
Example: Current product specifications and the targeted
market share call for a sales price of $250,000.
The required profit is $50,000 per unit. The
target cost is computed as follows:
Target cost = $250,000 - $50,000 = $200,000

PPT 10 -32
A Life-Cycle Costing Example

Unit Cost and Price Information for New Product

Unit production cost $6

Unit life-cycle cost 10
Unit whole-life cost 12
Budgeted unit selling price 15

PPT 10 -33
Life-Cycle Costing Example (continued)
Budgeted
Costs
Item 2000 2001 2002 Item Total

Development costs $200,000 ---- ---- $ 200,000

Product costs ---- $240,000 $360,000 600,000
Logistic costs ---- 80,000 120,000 200,000
Annual subtotal $200,000 $320,000 $480,000 $1,000,000
Post purchase costs ---- 80,000 120,000 200,000
Annual total $200,000 $400,000 $600,000 $1,200,000
====== ====== ====== ========
Units produced 40,000 60,000

Note: the post purchase costs are costs incurred by the customer and are not
included in the budgeted income e statement.
PPT 10 -34
 Life-Cycle Costing Example
(continued)

Budgeted Product Income Statements

Annual Cumulative
Year Revenues Costs Income Income
2000 ---- $(200,000) $(200,000) $(200,000)
2001 $600,000 (320,000) 280,000 80,000
2002 900,000 (480,000) 420,000 500,000

PPT 10 -35
 Performance Report for
Life-Cycle Costs
Actual Budgeted
Year Item Costs Costs Variance
2000 Development $190,000 $200,000 $10,000 F
2001 Production 300,000 240,000 60,000 U
Logistics 75,000 80,000 5,000 F
2002 Production 435,000 360,000 75,000 U
Logistics 110,000 120,000 10,000 F

Analysis: Production costs were higher than expected because insertions of diodes
and integrated circuits also drive costs (both production and post purchase costs).
Conclusion: The design of future products should try to minimize total insertions.

PPT 10 -36
 Financial Perspective

The financial perspective has three strategic

themes:
 Revenue Growth

 Cost Reduction

 Asset Utilization

PPT 10 -37
Summary of Objectives and Measures:
Financial Perspective
Objectives
Revenue Growth:
Increase the number of new products
Create new applications
Develop new customers and markets
Adopt a new pricing strategy
Cost Reduction:
Reduce unit product cost
Reduce unit customer cost
Reduce distribution channel cost
Asset Utilization:
Improve asset utilization
Measures
Percentage of revenue from new products
Percentage of revenue from new applications
Percentage of revenue from new sources
Product and customer profitability
Unit product cost
Unit customer cost
Cost per distribution channel
Return on investment
Economic value added
PPT 10 -38
Summary of Objectives and Measures:
Customer Perspective
Objectives
Core:
Increase market share
Increase customer retention
Increase customer acquisition
Increase customer satisfaction
Increase customer profitability
Performance Value:
Decrease price
Decrease postpurchase costs
Improve product functionality
Improve product quality
Increase delivery reliability
Improve product image and reputation
Measures
Market share (percentage of market)
Percentage growth of business from
existing customers
Percentage of repeating customers
Number of new customers
Ratings from customer surveys
Customer profitability
Price
Postpurchase costs
Ratings from customer surveys
Percentage of returns
On-time delivery percentage
Aging schedule
Ratings from customer surveys
PPT 10 -39
Summary of Objectives and Measures:
Process Perspective
Objectives
Innovation:
Increase the number of new products
Increase proprietary products
Decrease new product development time
Measures
Number of new products vs. planned
Percentage revenue from proprietary
products
Time to market (from start to finish)

Operations:
Increase process quality Quality costs
Output yields
Percentage of defective units
Increase process efficiency Unit cost trends
Output/input(s)
Decrease process time Cycle time and velocity
MCE PPT 10 -40
Summary of Objectives and Measures:
Process Perspective (continued)

Objectives Measures

Postsales Service:
Increase service quality First-pass yields
Increase service efficiency Cost trends
Output/input
Decrease service time Cycle time

PPT 10 -41
 Process Perspective (continued)

Definitions
Cycle Time: The time required to produce one unit of product
Velocity: The number of units that can be produced in a given
period of time (e.g., units per hour)
Manufacturing
Cycle
Efficiency
(MCE) = Processing time
Processing time + Move Time + Inspection Time + Wait time

PPT 10 -42
 Process Perspective (continued)

Example 1
A plant has the theoretical capability of producing 10,000 bikes per
quarter. There are 20,000 production hours available each quarter.
Compute the theoretical cycle time and velocity.

Cycle time = 20,000 hrs/10,000 bikes

= 2 hrs per bike
Velocity = 10,000 bikes/20,000 hours
= 0.5 bikes per hour

PPT 10 -43
 Process Perspective (continued)

Example 2
A product has the following activities and times:
Processing (three departments): 10 hours
Moving (four moves): 3 hours
Waiting (for the second and third processes): 8 hours
Storage (before delivery): 19 hours

Compute MCE.
MCE = 10/(10+3+8+10) = 10/40
= 0.25 or 25%

PPT 10 -44
Summary of Objectives and Measures:
Learning and Growth Perspective
Objectives
Increase employee capabilities
Increase motivation and alignment
Increase information systems capabilities
Measures
Employee satisfaction ratings
Employee turnover percentages
Employee productivity (revenue/employee)
Hours of training
Strategic job coverage ratio (percentage of
critical job requirements filled)
Suggestions per employee
Suggestions implemented per employee
Percentage of processes with real-time
feedback capabilities
Percentage of customer-facing employees
with on-line access to customer and
product information
PPT 10 -45
End of Chapter 10

PPT 10 -46