ACTIVITY-BASED COSTING a.

Value-added Activity (VA)

DEFINITION
- Activity-based Management is a management
approach that associates the activities executed
by an organization with the value customers
derived from products.
o An activity that increases the worth of a
products or service to the consumers and
for which the customer is willing to pay.
b. Non-value-added Activity (NVA)
o An activity that increases the time spent
on a product or service but does not
increase its worth.

OBJECTIVE OF ACTIVITY-BASED BUSINESS-VALUE-ADDED ACTIVITY

- Efficiency and effectiveness are achieved by
reducing the level of activities that do not
create value for the customer and by improving
execution of activities that do create customer
values.
- In short, it reduces or eliminate non-value-
added activities incurred to make a product or
provide a service.
- An activity that is necessary for the operation of
a business for which a customer would not want
to pay.
CYCLE TIME
- The sum of the non-value-added time and the
value-added time.

SPECIFIC TOOLS UNDER ABM Formula: NVA + VA

a. Activity Analysis ENTIRE PROCESSING TIME OF AN ENTITY

b. Cost driver Analysis
c. Activity-based Costing There are four (4) types of time that composes the entire
d. Continuous Improvement processing time of an entity.
e. Operational Control
1. Processing (or service) time
f. Performance evaluation
2. Inspection time
g. Business Process Reengineering
3. Transfer time
ACTIVITY-BASED COSTING 4. Idle time

- a cost accounting system that focuses on the PROCESSING TIME

various activities performed in an organization
- Also known as ‘service time’
and collects costs on the basis of the underlying
- The actual time it takes to perform the functions
nature and extent of those activities.
necessary to manufacture a product or perform
CONTINUOUS IMPROVEMEMT a service.
- This quantity of time is VALUE-ADDED.
- an ongoing process of enhancing employee task
performance, level of product quality, and level INSPECTION TIME
of company service through eliminating non-
- Time taken to perform quality control
value-added activities to reduce lead time,
activities.
making products (performing services) with zero
- NON-VALUE-ADDED TIME.
defects, reducing products costs on an ongoing
basis, and simplifying products and processes. TRANSFER TIME
DEFINITION OF AN ACTIVITY - Time consumed moving products or
components from one place to another.
- A repetitive action performed in fulfillment of
- NON-VALUE-ADDED TIME.
business functions.
- It may be designated as value-added and non-
value added.
IDLE TIME
- The amount of time spent in storing inventory
or waiting at a production operation for
processing.
- NON-VALUE-ADDED TIME.
NON-VALUE-ADDED TIME
- the difference between lead time and production
time.
Formula: Lead time – Production time
➢ Lead time – the time goods are passed from
suppliers to buyers.
PROCESS
- A series of activities that, when performed
together, satisfy a specific objective.
PROCESS MAP
- A detailed flowchart that indicates every step
that goes into making a product or providing a
service.
SERVICE TIME
- The actual time it takes to perform a specific
task.
MANUFACTURING CYCLE EFFICIENCY (MCE)
- A measure of efficiency.
- a ratio resulting from dividing the value-added
processing time by total cycle time.
- The longer the cycle time, the longer time the
product has to “pull” costs to it.
TAKE NOTE:
➢ JIT Manufacturing process may achieve
higher efficiency, eliminating idle time for
storage and thus increasing MCE.
➢ A service company would compute service cycle
efficiency is a ratio resulting from dividing the
actual service time by total cycle time.
QUALITY COST
Quality costs are categorized into four (4):
1. Prevention costs
2. Appraisal costs
3. Internal Failure costs
4. External Failure costs
o PREVENTION COSTS
▪ The costs wanted to spend to
prevent defects.
▪ It should be minimized
o APPRAISAL COSTS
▪ The quality costs that are
incurred to determine whether
particular units of products meet
quality standards.
▪ It should be minimized
o INTERNAL FAILURE COSTS
▪ The cost to repair a unit of
product that fails before it is
sold.
▪ It cannot be minimized
o EXTERNAL FAILURE COSTS
▪ The cost to repair a unit of
product that fails after it is sold.
▪ It cannot be minimized
REENGINEERING
- It describes the development of new ways to
perform existing activities and ways to stop
performing non-value-adding activities.
BENCHMARKING
- The practice of comparing your company with
some of the industry leaders.
PROCESS VALUE ANALYSIS (PVA)
- It uses activity analysis to manage costs
- It focuses on manufacturing processes and seeks
to reduce (NVA) or optimize the activities
performed within a process.