Accounting managerial

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PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
© Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
5 ACTIVITY-BASED MANAGEMENT

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LEARNING GOALS
After studying this
chapter, you should be
able to:
LEARNING OBJECTIVES

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1. Describe activity-based management &
explain its relationship to activity-based
costing.
2. Explain process value analysis.
3. Describe activity performance
measurement.
4. Describe activity-based customer &
supplier costing
LEARNING OBJECTIVES
Click the button to skip
Questions to Think About

4. 4
QUESTIONS TO THINK ABOUT:
Roberts Truck Products (RTP)
Why is accurate cost information
about customers & suppliers
important?
What is wrong with the claim that
all customers are good customers?

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QUESTIONS TO THINK ABOUT:
Roberts Truck Products (RTP)
Will accurate cost information
guarantee that a firm is
competitive?

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QUESTIONS TO THINK ABOUT:
Roberts Truck Products (RTP)
How can managing activities
increase efficiency?
How can we determine whether
activities are of value to a firm?

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QUESTIONS TO THINK ABOUT:
Roberts Truck Products (RTP)
What role, if any, do cost
reports play in managing
activities?

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1
Describe activity-based
management & explain its
relationship to activity-
based costing.
LEARNING OBJECTIVE

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ACTIVITY-BASED
MANAGEMENT: Definition
A systemwide, integrated
approach that focuses
management’s attention on
activities for improving customer
value and profit.
LO 1

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2-DIMENSIONAL ABM MODEL
EXHIBIT 5-1
LO 1
2-dimensional
model shows
intersection of
cost & process.

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ABM MODEL: Cost Dimension
Information about resources, activities, cost
objects such as
Useful for products, customers, suppliers,
distribution channels
Objective: improving accuracy of cost
assignments
LO 1

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ABM MODEL: Process Dimension
Information about
What activities are performed
Why activities are performed
How well they are performed
Objective: cost reduction
Provides ability to engage in & measure
continuous improvement
LO 1

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ABM & ABC
ABM incorporates & extends ABC
ABM objectives
Inproving decision making with accurate cost
information
Reducing costs by encouraging, supporting
continuous improvements efforts
LO 1

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ABM IMPLEMENTATION MODEL
EXHIBIT
5-2
LO 1

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SYSTEMS PLANNING
Addresses these issues
Purpose, objectives of ABM system
Organizations current & desired competitive
position
Organization’s business processes & product mix
Timeline, assigned responsibilities, resources
required for implementation
Ability of organization to implement, learn, use
new information
LO 1

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ACTIVITY IDENTIFICATION,
DEFINITION, CLASSIFICATION
Knowing tasks that define activity helps
improve efficiency
Classifying activities allows ABM to connect
with other continuous improvement initiatives
JIT manufacturing
TQM
Total environmental quality cost management
LO 1

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WHY DOES ABM FAIL?
Implementation failure due to
Lack of support from higher level management
Results that do not occur as expected
Significant investment in education, training not
made
Resistance to change
Failure to integrate new system
LO 1

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ABM & RESPONSIBILITY
ACCOUNTING
Responsibility accounting is fundamental tool
of managerial accounting control
Also related to process value analysis (PVA)
Assigning responsibility
Establishing performance measures, benchmarks
Evaluating performance
Assigning rewards
LO 1

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RESPONSIBILITY ACCOUNTING
SYSTEM
3 ways to assign responsibility and measure
performance
Financial (functional)-based system
Activity-based system
Strategic-based system (Ch. 16)
LO 1

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FINANCIAL-BASED SYSTEMS
Assigns responsibilities, measures
performance in financial terms
Useful in environments with slow or little
change
Concrete pipes, blocks
Well- defined or relatively stable
environments
LO 1

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ACTIVITY-BASED SYSTEMS
Developed for firms in continuous
improvement environment
Assigns responsibilities to processes
Uses both financial & nonfinancial measures
of performance
Useful in environment that experience rapid
change
Computer technology
LO 1

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COMPARING SYSTEMS:
Assigning Responsibilities
LO 1
EXHIBIT 5-4
Assignment based
on function
Assignment
emphasizes
improvement

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COMPARING SYSTEMS:
Measuring Performance
LO 1
EXHIBIT 5-5
Financial
performance
measures
Process
improvement
measures

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COMPARING SYSTEMS:
Evaluating Performance
LO 1
EXHIBIT 5-6
Meet/beat
financial standard
Evaluates time,
quality, efficiency
& financial
standards

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GAINSHARING: Definition
ABM system allows employees to
share in gains related to specific
improvement projects.
LO 1

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2 Explain process value
analysis.
LEARNING OBJECTIVE

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PROCESS VALUE ANALYSIS:
Definition
PVA emphasizes accountability
for activities rather than costs;
focuses on systemwide
performance.
LO 2
PROCESS VALUE ANALYSIS:
Definition

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PVA CONCERNS
Driver analysis
Activity analysis
Activity performance measurement
LO 2

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DRIVER ANALYSIS: Definition
Understanding what causes
activity costs by understanding
activity inputs & outputs; most
basic causes for an activity being
performed.
LO 2
ROOT CAUSES: Definition

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Why are “root causes” so
important?
Because the root cause of 1
activity may be root cause of
related activities.
LO 2

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ACTIVITY ANALYSIS: Definition
The process of identifying,
describing, evaluating the
activities an organization
performs.
LO 2

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ACTIVITY ANALYSIS
OUTCOMES
What activities are done
How many people perform the activities
Time, resources required to perform
activities
Assessing value of activities to
organization
Activities can be classified as
Value-added
Non-value-added
LO 2

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What are “value-added”
activities?
Value-added activities are
activities that are necessary to
remain in business.
LO 2

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VALUE-ADDED ACTIVITIES
Are
Mandatory to comply with laws
Discretionary
Produces a change of state
Not achievable by preceding activities
Enables other activities to be performed
Performed at a value-added cost to achieve
perfect efficiency
Eliminate waste & reduce costs
LO 2

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NON-VALUE-ADDED ACTIVITIES
Are unnecessary
Fail to satisfy 3 defining conditions of
value-added activities
Incur non-value-added costs of
inefficiency
LO 2

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NON-VALUE-ADDED
ACTIVITIES: Examples
Scheduling
Moving
Waiting
Inspecting
Storing
LO 2
Challenge of activity
analysis: produce
goods without using
non-value-added
activities.

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KAIZEN COSTING: Definition
The effort to reduce costs of
existing products & processes.
LO 2

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REDUCING COSTS
Activity elimination
Focusing on non-value-added activities
Activity selection
Choosing among different sets of activities
Activity reduction
Reducing time, resources required
Activity sharing
Using economies of scale
LO 2

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ACTIVITY PERFORMANCE
MEASUREMENT: Definition
Assessing how well an activity
was performed and results
achieved using both financial
& nonfinancial measures.
LO 2

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ACTIVITY PERFORMANCE
MEASURES
Efficiency
Relationship of activity inputs & outputs
Quality
Doing it right the first time
Time
Shortening activity time
LO 2

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Value-added activities are activities that are necessary to achieve
corporate objectives and remain in business.
Value-added costs are costs caused by value-added activities.
Nonvalue-added activities are unnecessary activities and are all
activities other than those that are absolutely essential to remain in
business.
Nonvalue-added costs are costs caused by either: nonvalue-added
activities, or the inefficient performance of value-added activities.
Activity analysis attempts to:
identify and eliminate all unnecessary activities, and
increase the efficiency of necessary activities.
VALUE-ADDED & NON VALUE-
ADDED ACTIVITIES AND COSTS

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Five major categories of nonvalue-
added activities are:
1- Scheduling :an activity that uses time and resources to
determine when different products have access to processes (or
when and how many setups must be done) and how much will be
produced.
2- Moving :an activity that uses time and resources to move raw
materials, work in process, and finished goods from one
department to another.
3- Waiting :an activity in which raw materials or work in process
use time and resources by waiting on the next process.
4- Inspecting :an activity where time and resources are spent on
ensuring that the product meets specifications.
5- Storing : an activity that uses time and resources while a good
or raw material is held in inventory.
- None of the above activities adds any value for the customer.
Activity management tries to manufacture the product without using any
of these nonvalue-added activities.

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1- A systemwide, integrated approach that focuses management's attention
on activities with the objective of improving customer value and the profit
achieved by providing this value is
a. activity-based management
b. activity-based costing
c. activity-based analysis
d. none of the above
Ans: a
2- Which of the following process dimensions of the activity-based
management model deals with "why"?
a. resources
b. driver analysis
c. activities
d. performance measures
Ans :b
3- Which of the following process dimensions of the activity-based
management model deals with "what"?
a. resources
b. driver analysis
c. activities
d. performance measures
Ans: C

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5- Which of the following statements is correct concerning activity-based
management(ABM)?
a. ABM encompasses process value analysis only.
b. ABM emphasizes process,financial,and non-financial measures.
c. The ABM model has two dimensions, cost and process.
d. The ABM model is static in nature.
Ans : C
4- Which of the following process dimensions of the activity-based
management model deals with "how well"?
a. resources
b. driver analysis
c. activities
d. performance measures
Ans: D
6- Which of the following is part of both the cost and process dimensions of
the activity-based management model?
a. resources
b. driver analysis
c. activities
d. products and customers
Ans : c

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7- Which of the following is NOT an objective of activity-based management?
a. to improve decision making through better cost information
b. to increase the number of activities necessary to perform processes
c. to encourage cost reduction through continuous improvement
d. to increase profitability
Ans: b
8- The functional-based responsibility accounting model is appropriate for
which of the following environments?
a. relatively stable environments
b. dynamic environments
c. both stable and dynamic environments
d. neither stable nor dynamic environments
Ans : a
9- Organizational units such as departments are used to assign responsibility
in which of the following systems?
a. standard cost responsibility systems
b. activity-based responsibility systems
c. functional-based responsibility accounting systems
d. strategic responsibility accounting systems
Ans : c

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10- Which of the following describes functional-based responsibility accounting?
a. it assumes that activities are linked through processes
b. its focus is team accountability
c. its control emphasis is individual accountability
d. its goal is continuous improvement
Ans :c
11-Which of the following is descriptive of activity-based responsibility accounting
a. It assumes that activities can be collected into independent subgroups.
b. Its focus is the organization.
c. Its control emphasis is costs.
d. Its standards are engineered and tend to be static.
Ans :b
12-Process value analysis does NOT involve which of the following?
a. driver analysis
b. activity analysis
c. functional analysis
d. activity performance measurement
Ans: c

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13-Which of the following is a value-added activity?
a. moving
b. inspection
c. processing
d. waiting
Ans : c
14-Value-added costs are standard costs based on which of the following?
a. currently attainable standards
b. ideal usage standards
c. cycle time
d. the value added
Ans : b
15-Which of the following are considered nonvalue-added costs?
a. the cost of efficient value-added activities
b. the cost of activities that are necessary to comply with legal mandates.
the cost of nonvalue-added activities
d. all of the above
Ans: C

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3
Describe activity
performance
measurement.
LEARNING OBJECTIVE

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FINANCIAL MEASURES OF
ACTIVITY PERFORMANCE
For potential & actual savings
Value- & non-value-added activity cost reports
Trends in activity cost reports
Kaizen standard setting
Benchmarking
Life-cycle costing
LO 3

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VALUE-ADDED STANDARD
Calls for elimination of non-value-added
activities
Identifies optimal activity output
Compares actual to value-added activity costs
allowing management to
Assess level of activity inefficiency
Determine potential for improvement
LO 3

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FORMULAS
SQ: value-added output level
SP: standard price per output measure
AQ: actual quantity used of flexible resources
LO 3
Value-added = SQ x SP
Non-value-added costs = (AQ – SQ)SP
EXHIBIT 5-8

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COST REPORT: Step 1
Activity Activity Driver SQ* AQ* SP*
Welding Welding hours 10,000 12,000 $40
Rework Rework hours 0 10,000 9
Setups Setup hours 0 6,000 60
Inspection # Inspections 0 4,000 15
LO 3

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COST REPORT: Step 2
Activity
Value-
Added Costs
Non-Value-
Added Costs
Actual
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
LO 3
EXHIBIT 5-9

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COST REPORT: Step 2
Activity
Value-
Added
Non-Value-
Added
Actual
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
LO 3
EXHIBIT 5-9
Cost report
emphasizes the
opportunity for
improvement.

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TREND REPORTING
Allows management to follow up on
actions taken to reduce costs by
examining whether outcomes were
as expected.
LO 3

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TREND REPORT: Step 3
Activity
Last
Year
Current
Year 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
LO 3
EXHIBIT 5-10
Trend report
shows
improvement that
has been made.
Non-Value-Added Costs

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What is kaizen costing?
Kaizen costing helps reduce
costs by repeated use of 2
subcycles: 1) continuous
improvement, and 2)
maintenance.
LO 3

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BENCHMARKING: Definition
LO 3
Uses “best practices” as the
standard for evaluating activity
performance with the goal of
becoming the best at performing
activities & processes.

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ACTIVITY CAPACITY : Definition
LO 3
Activity drivers measure
activity capacity, that is the
number of times an activity can
be performed.

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CAPACITY VARIANCES
Unused capacity, the difference
between activity availability &
activity usage, needs management
attention to reduce costs.
LO 3