Copyright © 2013 Nelson Education Ltd. PowerPoint Presentations for Cornerstones of Cost Accounting...

Copyright © 2013 Nelson Education Ltd.

PowerPoint Presentations for

Cornerstones of Cost AccountingFirst Canadian Edition

Adapted byGeorge GekasRyerson University

ACTIVITY-BASED MANAGEMENT 14

14-2Copyright © 2013 Nelson Education Ltd.

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The Relationship of Activity-Based Costing and Activity-Based Management

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• Continuous Improvement • Process of improving performance by constantly

searching for ways to eliminate waste.

• Activity-Based Management (ABM)• Systemwide, integrated approach that focuses

management’s attention on activities with the objectives of improving customer value and the profit achieved by providing this value

• Activity-Based Costing (ABC) • Major source of information for activity-based

management

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The Relationship of Activity-Based Costing and Activity-Based Management

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Process Dimension: Process Value AnalysisProcess Value Analysis (PVA)• 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:1. Driver analysis2. Activity analysis3. Performance measurement

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Process Dimension: Process Value AnalysisDriver Analysis

• The effort expended to identify the factors that are the root causes of activity costs.

Activity Analysis• The process of identifying, describing, and evaluating the

activities an organization performs.• Should produce four outcomes:

1. What activities are performed2. How many people perform the activities3. The time and resources are required to perform the

activities4. An assessment of the value of the activities to the

organization• Activities can be value-added or non-value-added

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Process Dimension: Process Value AnalysisValue-Added Activities• Activities necessary to remain in business• Contribute to customer value and/or help meet an

organization’s needs• Some activities are discretionary but are also value added:

• Activity produces a change of state• Change of state was not achievable by preceding activities• Activity enables other activities to be performed

• Value-Added Costs• Costs to perform value added activities with perfect

efficiency

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Process Dimension: Process Value AnalysisNon-Value-Added Activities• All activities other than those essential to remain in

business• Fail to produce a change in the product’s state or

replicate work because it wasn’t done correctly the first time

• In manufacturing, five major wasteful and unnecessary activities:1. Scheduling

2. Moving

3. Waiting

4. Inspecting

5. Storing

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Process Dimension: Process Value Analysis

Activity management can reduce costs in four ways:

1. Activity elimination

2. Activity selection

3. Activity reduction

4. Activity sharing

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Cost Dimension: Financial Measures of Activity Efficiency

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Reporting Value- and Non-Value-Added Costs

Reporting Value- and Non-Value-Added Costs

See Cornerstone 14-1

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See Cornerstone 14-3

Kaizen CostingKaizen Costing

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BenchmarkingBenchmarking

Internal Benchmarking

Benchmarking against internal operations

External Benchmarking

Benchmarking that involves comparison with others outside the organization

• Complimentary approach to Kaizen costing and activity-based management

• Uses best practices found within and outside the organization as the standard for evaluating and improving activity performance

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Activity Flexible BudgetingActivity Flexible Budgeting

The prediction of what activity costs will be as activity output changes

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Activity Capacity •The number of times an activity can be performed

What should the activity capacity be?

How much of the capacity acquired was actually used?

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Implementing Activity-Based Management

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• Activity-Based Management (ABM) • Objectives:

• Improving decision making by providing accurate cost information

• Reducing costs by encouraging and supporting continuous improvement efforts

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• Systems planning provides the justification for implementing ABM and addresses the following issues:1. The purpose and objectives of the ABM system

2. The organization’s current and desired competitive position

3. The organization’s business processes and product mix

4. The timeline, assigned responsibilities, and resources required for implementation

5. The ability of the organization to implement, learn, and use new information

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• 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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Activity-Based Responsibility Accounting

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Responsibility Accounting • Fundamental tool of managerial control• Objective:

• To influence behaviour in such a way that individual and organizational initiatives are aligned to achieve a common goal or goals

• Four essential elements:1. Assigning responsibility

2. Establishing performance measures or benchmarks

3. Evaluating performance

4. Assigning rewards

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Assigning ResponsibilityAssigning Responsibility

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Establishing and Evaluating Performance Measures

Establishing and Evaluating Performance Measures

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Assigning RewardsAssigning Rewards

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End of Chapter 14

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