COST MANAGEMENT

Accounting & Control

HansenMowenGuan

Chapter 12
Activity-Based Management
COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.

Study Objectives
1. Describe how activity-based management and
activity-based costing differ.
2. Define process value analysis.
3. Describe activity-based financial performance
measurement.
4. Discuss the implementation issues associated
with an activity-based management system.
5. Explain how activity-based management is a
form of responsibility accounting, and tell how it
differs from financial-based responsibility
accounting.
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The Relationship of Activity-Based Costing

and Activity-Based Management
Activity-based management (ABM) is a
Systemwide, integrated approach
Focuses managements attention on activities
with the objectives of improving
Customer value
The profit achieved by providing this value

ABC is the major source of information for

activity-based management.
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The Relationship of ABC and ABM

Process Value Analysis

Process value analysis
Fundamental to activity-based responsibility
accounting
Focuses on accountability for activities rather than
costs
Emphasizes the maximization of systemwide
performance instead of individual performance

Process value analysis is concerned with:

Driver analysis
Activity analysis
Performance measurement
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Process Value Analysis

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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Process Value Analysis

Value-added activities
Necessary to remain in business
By mandate (e.g., comply with SEC reporting
requirements)
May contain nonessential actions that create
unnecessary cost.

Nonvalue-added activities
All activities other than those essential to
remain in business
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Process Value Analysis

Nonvalue-added activities
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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Process Value Analysis

Kaizen costing: constant incremental
improvement, including cost reduction through
activity management
Activity elimination
Focus on eliminating nonvalue-added activities

Activity selection
Choose among sets of competing strategies

Activity reduction
Decrease time and resources required by an activity

Activity sharing
Use economies of scale to increase efficiency
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Process Value Analysis

Assessing activity performance
Financial measures
Nonfinancial measures

Dimensions of performance assessment

Efficiency
Quality
Time

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Financial Measures of Activity

Efficiency
Reveal the current level of efficiency and
the potential for increased efficiency
Value- and nonvalue-added activity costs
Trends in activity costs
Kaizen standard setting
Benchmarking
Activity flexible budgeting
Activity capacity management
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Financial Measures of Activity

Efficiency

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Financial Measures of Activity

Efficiency
Activity
Purchasing
Molding
Inspecting
Grinding

Activity Driver
SQAQ SP
Purchasing hours 20,00023,000$20
Molding hours
30,00034,00012
Inspection hours
06,000 15
Number of units
05,000 6

Value-added
standards call for
elimination
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Financial Measures of Activity

Efficiency

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Financial Measures of Activity

Efficiency

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Financial Measures of Activity

Efficiency
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
Kaizen (continuous improvement) cycle
Maintenance cycle

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Financial Measures of Activity

Efficiency

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Financial Measures of Activity

Efficiency
Benchmarking
Uses 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
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Financial Measures of Activity

Efficiency
Activity flexible budgeting
Predicted activity costs reflect activity output
changes
Multiple cost drivers require multiple flexible
budget formulas
Describe both flexible and committed
resources

19

Financial Measures of Activity

Efficiency

20

Financial Measures of Activity

Efficiency

21

Financial Measures of Activity

Efficiency

22

Financial Measures of Activity

Efficiency

23

Financial Measures of Activity

Efficiency

24

Financial Measures Of Activity

Efficiency
Activity capacity
The number of times an activity can be
performed

Activity capacity management

Measured by activity drivers
Capacity variances
Activity volume variance
Unused capacity variance
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Financial Measures of Activity

Efficiency

26

Implementing ABM

(continued on next slide)

27

Implementing ABM
(continued from previous slide)

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Implementing ABM
1.
2.
3.
4.
5.

Systems 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.
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Implementing ABM
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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Financial-Based vs Activity-Based
Responsibility Accounting

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Financial-Based vs Activity-Based
Responsibility Accounting
Assigning responsibility
Financial-based
Focuses on functional organizational units and
individuals
Emphasis on optimum results at the local level

Activity-based
Focuses on processes and teams
Emphasis on systemwide optimization

32

Financial-Based vs Activity-Based
Responsibility Accounting

33

Financial-Based vs Activity-Based
Responsibility Accounting
Establishing performance measures
Financial-based
Budgeting and standard costing
Measures are objective and financial; stable over
time

Activity-based
Measures are process-orientated; structured to
support change

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Financial-Based vs Activity-Based
Responsibility Accounting

35

Financial-Based vs Activity-Based
Responsibility Accounting
Evaluating performance
Financial-based
Compare actual outcomes with budgeted
outcomes

Activity-based
Financial perspective
Other critical dimensions: time, quality, efficiency

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Financial-Based vs Activity-Based
Responsibility Accounting

37

Financial-Based vs Activity-Based
Responsibility Accounting
Assigning rewards
Both systems
Management policy and discretion

Financial-based
Individual achieves or beats budget standards
Profit-sharing (individual)

Activity-based
Multidimensional measurement and reward
Gainsharing (group-based)
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Financial-Based vs Activity-Based
Responsibility Accounting

39

COST MANAGEMENT
Accounting & Control
HansenMowenGuan

End Chapter 12

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.

Cengage Learning and South-Western are trademarks used herein under license.

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