GROUP 12

LongLong-term contracts with suppliers. Grouped payments to vendor.

Only a few suppliers.

Minimal inspection of materials.

Parts delivered in small lots.

Activity-Based Management
The use of activity analysis to help management make decisions

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

BACKGROUND
PARADIGM TOWARDS ORGANIZATION BUSINESS ENVIRONMENT CHARACTERISTICS MANAGEMENT APPROACH ORGANIZATION AS A POOL OF SHARED COMPETENCIES AND RESOURCES CUSTOMER COMPLEX & SHARP COMPETITION INFORMATION TECHNOLOGY

ACTIVITY-BASED MANAGEMENT

DEFINITION OF ABM

RESOURCES

ACTIVITY

PRODUCTS & SERVICES

CUSTOMER VALUE USAGE PROCCESS

CUSTOMER SATISFACTION

INPUT

PROCESS

OUTPUT

CUSTOMER

DEFINITION

The method used to manage business process will be a major factor in determining the survival of corporation in the coming decade (Noland D. Archibald)

Activity-Based Management
ABM describes management decisions that use activity-based costing information to satisfy customers and improve profits.
Product pricing and mix decisions Cost reduction and process improvement decisions Design decisions

Product Pricing and Mix Decisions

ABC gives management insight into the cost structures for making and selling diverse products. It provides more accurate product cost information and more detailed information on costs of activities and the drivers of those costs.

Cost Reduction and Process Improvement Decisions

Manufacturing and distribution personnel use ABC systems to focus on cost-reduction efforts.
Managers set cost-reduction targets in terms of reducing the cost per unit of the cost-allocation base.

Design Decisions
Management can identify and evaluate new designs to improve performance by evaluating how product and process designs affect activities and costs. Companies can work with their customers to evaluate the costs and prices of alternative designs.

Two-Dimensional ABC and Activity-Based Management C st ssi t Vi

Resource costs
Pr c ss Vi
cti it
Root Causes

l sis
Activity Triggers

cti it E

ti

Activities

Performance Measures

Cost Objects

Two-Dimensional ABC and Activity-Based Management C st ssi t Vi

ssi r s rc c sts t cti it c st ls.

Resource costs

Root Causes ssi cti it c sts t c st j cts si c st ri rs.

Activity Triggers

Activities

Performance Measures

Cost Objects

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 system-wide performance instead of individual performance. Process value analysis is concerned with: Driver analysis Activity analysis Activity performance measurement

IDENTIFYING ACTIVITY DRIVER

y Activity driver is a measure of frequency and intensity of cost object demands on an activity, used in assigning activity costs to cost objects.
y Example: y number of labor transactions y number of material moves y number of part numbers y number of part received y number of product y average number of option y number of schedule changes y number of vendors y number of units scraped y number of engineering change notice y number of units reworks

Activity Analysis
Activity analysis is the process of identifying, describing, and evaluating the activities an organization performs. Activity analysis should produce four outcomes:
   

What activities are done. 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.

ACTIVITY PERFORMANCE MEASURES

y Effici c y Relationship of activity inputs & outputs y Qualit y Doing it right the first time y Ti y Shortening activity time

Elimination of Non-Value-Added Costs

Activities

Anal sis and Classificati n N nvaluenvalueadded Activities

Reduce r Eli inate

ValueValueadded Acti ities

C ntinuall Evaluate and I r ve

Achieving Cost Reduction

Activit Reducti n Activit Selecti n

Reduce Non-ValueNon-Value-Added Costs

Activit S aring Activit Eli inati n

Value- vs. non-value-added

Would the customer willingly pay for the cost of the

activity?
Would the customer encourage doing more of the

activity?
Does the activity help the organization reach its goals?

An 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.

ValueValueAdded Activities

VALUE-ADDED ACTIVITY
VALUEADDED ACTIVITY? Meaningful change, both for previous process and next process NEXT ACTIVITY OR CUSTOMER Enable other activities to be done

PREVIOUS ACTIVITY Change cannot be done by previous process

Classification of Value-Added Activities

y Real value added activity (RVA):

activities that may add value to the product in customer s point of view. y Business value added activity (BVA): activities that increase value for the business but not for the consumer. Example: customer credit rating. y Non value added activity(NVA): activities that don t add value for both customer and business

All activities other than those essential to remain in business are referred to as non valueadded activities.

NonvalueNonvalueAdded Activities

Value-added vs. non-value-added activities

Activity Material handling Set-up Assembly Testing and inspection Rework Packaging Breaks and meetings Value-added? No No Yes Maybe No Maybe No

FINANCIAL MEASURES OF ACTIVITY PERFORMANCE

y For potential & actual savings y Value- & non-value-added activity cost reports y Trends in activity cost reports y Kaizen standard setting y Benchmarking y Life-cycle costing

COST REPORT: Step 1

Activity
Welding Rework Setups Inspection

Activity Driver
Welding hours Rework hours Setup hours # Inspections

SQ*
10,000 0 0 0

AQ*
12,000 10,000 6,000 4,000

SP*
$40 9 60 15

COST REPORT: Step 2

Activity
Welding Rework Setups Inspection Total

ValueAdded Costs
$400,000 0 0 0 $ 400,000

Non-ValueAdded Costs
$80,000 90,000 360,000 60,000 $ 590,000

Actual Costs
$480,000 90,000 360,000 60,000 $ 990,000

TREND REPORTING
Allows management to follow up on actions taken to reduce costs by examining whether outcomes were as expected.

TREND REPORT: Step 3

Non-Value-Added Costs Activity
Welding Rework Setups Inspection Total

Last Year
$80,000 90,000 360,000 60,000 $ 590,000

Current Year
$50,000 70,000 200,000 35,000 $ 355,000

Change
$30,000 20,000 160,000 25,000 $ 235,000

Trend report shows improvement that has been made.

KAIZEN COSTING
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 the maintenance cycle.

Kaizen Costing
The process of cost reduction during the manufacturing phase of an existing product.
Product cost Current year cost base.

.
3/31/0x

Cost base for next year.

3/31/0x

Kaizen Costing
The process of cost reduction during the manufacturing phase of an existing product.
Product cost

} .
3/31/0x

Kaizen goal costcost-reduction amount.

3/31/0x

BENCHMARKING: Definition
Uses best practices as the standard for evaluating activity performance with the goal of becoming the best at performing activities & processes.

Benchmarking
The continual search for the most effective method of accomplishing a task, by comparing existing methods and performance levels with those of other organizations.

Here are the best practices in our industry. . .

Life-Cycle Cost Budgeting

C st C
Life C cle C st % 100 90 80 70 60 50 40 30 20 10 Planning Design Testing Pr ducti n L gistics 90 ercent f life-c cle itted at c sts are c t is int

it ent Curve

Keys to Successfully Implementing ABC and ABM

1. Organizational Culture.

2. To - anage ent Co

it ent.

3. Change Cha

ion.

4. Change Process.

5. Continuing Education.