Study ObjectivesDescribe how activity-based management and activity-based costing differ.Define process value analysis.Describe activity-based financial performance measurement.Discuss the implementation issues associated with an activity-based management system.Explain how activity-based management is a form of responsibility accounting, and tell how it differs from financial-based responsibility accounting.

The Relationship of Activity-Based Costing and Activity-Based ManagementActivity-based management (ABM) is aSystemwide, integrated approachFocuses managements attention on activities with the objectives of improvingCustomer valueThe profit achieved by providing this valueABC is the major source of information for activity-based management.

The Relationship of ABC and ABM

Process Value AnalysisProcess value analysisFundamental to activity-based responsibility accountingFocuses on accountability for activities rather than costsEmphasizes the maximization of systemwide performance instead of individual performanceProcess value analysis is concerned with:Driver analysisActivity analysisPerformance measurement

Process Value AnalysisDriver 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.

Process Value AnalysisValue-added activitiesNecessary to remain in businessBy mandate (e.g., comply with SEC reporting requirements)May contain nonessential actions that create unnecessary cost.Nonvalue-added activitiesAll activities other than those essential to remain in business

Process Value AnalysisNonvalue-added activitiesSchedulingUses resources to determine access to processesMovingUses resources to move inventory among departmentsWaitingUses resources while waiting for next processInspectingUses resources to ensure conformance to standardsStoringUses resources while goods are held in inventory

Process Value AnalysisKaizen costing: constant incremental improvement, including cost reduction through activity managementActivity eliminationFocus on eliminating nonvalue-added activitiesActivity selectionChoose among sets of competing strategiesActivity reductionDecrease time and resources required by an activityActivity sharingUse economies of scale to increase efficiency

Process Value AnalysisAssessing activity performanceFinancial measuresNonfinancial measuresDimensions of performance assessmentEfficiencyQualityTime

Financial Measures of Activity EfficiencyReveal the current level of efficiency and the potential for increased efficiencyValue- and nonvalue-added activity costsTrends in activity costsKaizen standard settingBenchmarkingActivity flexible budgetingActivity capacity management

Financial Measures of Activity Efficiency

Financial Measures of Activity EfficiencyActivityActivity DriverSQAQSPPurchasingPurchasing hours20,00023,000$20MoldingMolding hours30,00034,00012InspectingInspection hours06,00015GrindingNumber of units05,0006

Financial Measures of Activity Efficiency

Financial Measures of Activity Efficiency

Financial Measures of Activity EfficiencyKaizen 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 subcyclesKaizen (continuous improvement) cycle Maintenance cycle

Financial Measures of Activity Efficiency

Financial Measures of Activity EfficiencyBenchmarkingUses best practices as the standard for evaluating activity performanceInternal benchmarkingBenchmarking against the best internal performanceExternal benchmarkingComparison with others outside the organization

Financial Measures of Activity EfficiencyActivity flexible budgetingPredicted activity costs reflect activity output changesMultiple cost drivers require multiple flexible budget formulas Describe both flexible and committed resources

Financial Measures of Activity Efficiency

Financial Measures of Activity Efficiency

Financial Measures of Activity Efficiency

Financial Measures of Activity Efficiency

Financial Measures of Activity Efficiency

Sheet1

Materials (SP AQ)15,600

Direct Materials Price Variance (AP - SP)AQ3,900

Accounts Payable (SP AQ)19,500

Work in Process (SH SR)2,400

Direct Labor Rate Variance (AR - SR)AH65

Direct Labor Efficiency Variance (AH - SH)SR200

Wages Payable (AH AR)2,665

To assign overhead to production:

Work in Process31,200

Variable Overhead Control7,200

Fixed Overhead Control24,000

To recognize the incurrence of actual overhead:

Variable Overhead Control7,540

Fixed Overhead Control20,500

Miscellaneous Accounts28,040

To recognize the variances:

Fixed Overhead Control3,500

Variable Overhead Efficiency Variance600

Fixed Overhead Spending Variance500

Variable Overhead Control340

Variable Overhead Spending Variance260

Fixed Overhead Volume Variance4,000

To close the variances to Cost of Goods Sold:

Fixed Overhead Volume Variance4,000

Variable Overhead Spending Variance260

Cost of Goods Sold4,260

Cost of Goods Sold1,100

Variable Overhead Efficiency Variance600

Fixed Overhead Spending Variance500

EVA=After-tax operating income-Weighted average cost of capital Total capital employed

Sheet2

Prime CostsPercentage of Total

Cost of Goods Sold4,765Work in Process$00%

Direct Materials Price Variance3,900Finished Goods3,48020

Direct Materials Usage Variance600Cost of Goods Sold13,92080

Direct Labor Rate Variance65Total$17,400100%

Direct Labor Efficiency Variance200

Ch. 11

ActivitiesActivity DriverActivity CapacityCurrent Activity DemandExpected Activity Demand

Material usageNumber of parts200,000200,00080,000

Assembling partsDirect labor hours10,00010,0005,000

Purchasing partsNumber of orders15,00012,5006,500

Warranty repairNumber of defective products1,000800500

Activity and Resource Information (annual estimates)

Design ADesign B

Units produced10,00010,000

Direct material usage100,000parts60,000parts

Labor usage50,000hours80,000hours

Machine hours25,00020,000

Purchase orders300200

Setup hours200100

Returned units40075

Repair time (customer)800150

Ch. 12

Budgeted Cost

ActivityActivity DriverSQAQSPActivityActual Cost25 Setups LevelVariance

PurchasingPurchasing hours20,00023,000$20Inspection:

MoldingMolding hours30,00034,00012Fixed$82,000$80,000$2,000U

InspectingInspection hours06,00015Variable43,50052,5009,000F

GrindingNumber of units05,0006Total$125,500$132,500$7,000F

Financial Measures Of Activity EfficiencyActivity capacityThe number of times an activity can be performedActivity capacity managementMeasured by activity driversCapacity variancesActivity volume varianceUnused capacity variance

Financial Measures of Activity Efficiency

Implementing ABM(continued on next slide)

Implementing ABM(continued from previous slide)

Implementing ABMSystems planning provides the justification for implementing ABM and address the following issues:The purpose and objectives of the ABM system.The organizations current and desired competitive position.The organizations 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.

Implementing ABMWhy ABM implementations failLack of support of higher-level management.Failure to maintain support from higher-level management.Resistance to change.Failure to integrate the new system.

Financial-Based vs Activity-Based Responsibility Accounting

Financial-Based vs Activity-Based Responsibility AccountingAssigning responsibilityFinancial-basedFocuses on functional organizational units and individualsEmphasis on optimum results at the local levelActivity-basedFocuses on processes and teams Emphasis on systemwide optimization

Financial-Based vs Activity-Based Responsibility Accounting

Financial-Based vs Activity-Based Responsibility AccountingEstablishing performance measuresFinancial-basedBudgeting and standard costingMeasures are objective and financial; stable over timeActivity-basedMeasures are process-orientated; structured to support change

Financial-Based vs Activity-Based Responsibility Accounting

Financial-Based vs Activity-Based Responsibility AccountingEvaluating performanceFinancial-basedCompare actual outcomes with budgeted outcomesActivity-basedFinancial perspectiveOther critical dimensions: time, quality, efficiency

Financial-Based vs Activity-Based Responsibility Accounting

Financial-Based vs Activity-Based Responsibility AccountingAssigning rewardsBoth systemsManagement policy and discretionFinancial-basedIndividual achieves or beats budget standardsProfit-sharing (individual)Activity-basedMultidimensional measurement and rewardGainsharing (group-based)

Financial-Based vs Activity-Based Responsibility Accounting

COST MANAGEMENTAccounting & ControlHansenMowenGuan

End Chapter 12