4

 Describe Activity-based management and

explain its relationship to ABC
 Explain process value analysis
 Explain activity performance measurement
 Describe activity-based financial performance
measurement.

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 DEFINITION ACTIVITY BASED MANAGEMENT
•Activity-based management (ABM) is
• a systemwide, integrated approach
• Focusing management’s attention on
activities with the objectives of
a. improving customer value
b. The profit achieved by this value.

•ABC is the major source of information for

activity-based management.

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 The use of
activity analysis
to help
management
do their functions

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 Once product costs
are obtained using ABC,
info can be used in decision making
Called Activity Based
Management

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 Activity-based
costing establishes Activity-based
relationships management
between overhead focuses
costs and activities on managing
so that we can activities to reduce
better allocate costs.
overhead

ABC ABM

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  Processes are the way things are
done to change process has to
change the way things done
 Methods of changing processes:
1. Process improvement
2. Process innovation
3. Process creation

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  Organization needs to exercise control over
its operations so that its objectives are
achieved  what is measured and rewarded
can have an important effect on an
organization’s efforts to achieve these
objectives
 “You get what you measure and reward”, and
“if you don’t measure it, it won’t improve,
and if you don’t monitor it, it will get worse’

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 Management accounting offers the following three
types of responsibility accounting systems.

Functional-based
Activity-based
Strategic-based

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  Process value analysis
◦ Fundamental to activity-based responsibility
accounting
◦ Focuses on accountability for activities rather
than costs

 Process value analysis is concerned with:

1. Driver analysis
2. Activity analysis
3. Performance measurement

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  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.

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 Activities

Analysis and
Classification
Nonvalue- Value-
added added
Activities Activities
Reduce or Continually Evaluate
Eliminate and Improve

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 Process Value Analysis

All activities other than those essential

to remain in business are referred to as
nonvalue-added activities. These
activities fail to produce a change in the
product’s state or those activities that
replicate work because it wasn’t done
correctly the first time.

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 MANDATORY VALUE –ADDED ACTIVITIES

Those activities necessary to remain in

business are called value-added activities.

Activities needed to comply with the reporting

requirements, such as the SEC, are value-
added by a mandate.

Implicit in this definition is the notion that

value-added activities may contain nonessential
actions that create unnecessary cost.

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 A discretionary activity is classified
as value-added provided it
simultaneously satisfies three
conditions:
1. The activity produces a change of state.
2. The change of state was not achievable
by preceding activities.
3. The activity enables other activities to be
performed.

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  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

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 Activity Activity
Reduction Selection

Reduce
Non-Value-Added
Costs

Activity Activity
Sharing Elimination

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 Activity Selection
Value-Added
Activities
Activity Sharing

Activity Reduction Non-Value-

Added
Activity Elimination
Activities

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  Assessing activity performance
1. Financial measures
2. Nonfinancial measures

 Dimensions of performance assessment

1. Efficiency input and output relationship
2. Quality doing an activity right at the first time
3. Time  time needed to perform an activity

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 Financial measures of activity efficiency
1. Value and nonvalue-added cost reports
2. Trends in activity cost reports
3. Kaizen standard setting
4. Benchmarking
5. Activity capacity management

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 Activity Activity Driver SQ AQ SP
Welding Welding hours 10,000 12,000 $40
Rework Rework hours 0 10,000 9
Setup Setup hours 0 6,000 60
Inspection Number of insp. 0 5,000 15

Value-added
standards call for
elimination

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 Value- and Nonvalue-Added Cost Report

Value-Added Nonvalue- Net

Activity Costs Added Costs Costs
Welding $400,000 $80,000 $480,000
Rework 0 90,000 90,000
Setups 0 360,000 360,000
Inspection 0 60,000 60,000
Total $400,000 $590,000 $990,000

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 Trend Report: Nonvalue-Added Costs

Nonvalue-Added Costs
Activity 2010 2011 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

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 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
1. Kaizen cycle  PDCA
2. Maintenance cycle

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  Use the 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
competitive
Functional
 Generic

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  Activity capacity
◦ The number of times an activity can be performed

 Activity capacity management

◦ Measured by activity drivers
◦ Capacity variances
1. Activity volume variance
2. Unused capacity variance

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 Implementing Activity-Based
Management
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.

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 The End

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