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ADVANCED MANAGEMENT

ACCOUNTING

PPT 14 -1

Activity Based Management

PPT 14 -2

Activity-Based Management (ABM)


Activity-based management (ABM) is a
systemwide, integrated approach that focuses
managements attention on activities with the
objective of improving customer value and
the profit achieved by providing this value.
Activity-based management encompasses
both product costing and process value
analysis.
PPT 14 -3

Activity-Based Management Model


Cost Dimension

Process Dimension

Driver Analysis
Why?

Resources

Activities
What?

Performance Measures
How Well?

Products and
Customers
PPT 14 -4

Process Value Analysis


Process value analysis is fundamental to activitybased 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:
Driver analysis
Activity analysis
Performance measurement
PPT 14 -5

Activity Analysis
Activity analysis should produce four outcomes:
What activities are performed?
How many people perform the activities?
The time and resources required to perform the activities.
An assessment of the value of the activities to the organization,
including a recommendation to select and keep only those that
add value.
PPT 14 -6

Value-Added Activities
A discretionary 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.

PPT 14 -7

Nonvalue-Added Activities
Nonvalue-Added Activities are activities that add cost and impede
performance.
Scheduling
Moving
Waiting

Examples

Inspecting
Storing

PPT 14 -8

Activity Analysis
Activity Analysis Can Reduce Costs in Four Ways:

Activity elimination
Activity selection
Activity reduction
Activity sharing

PPT 14 -9

Activity Performance Measurement

Three Dimensions of Activity Performance


Efficiency
Quality
Time

PPT 14 -10

Measures of Activity Performance


Financial measures of activity
efficiency include:
Value and nonvalue-added
activity cost reports
Trends in activity cost reports
Kaizen standard setting
Benchmarking

PPT 14 -11

Value- and Nonvalue-Added


Cost Reporting
Consider the following data:
Activity

Activity Driver

SQ

AQ

SP

Welding

Welding hours

10,000

8,000

$40

Rework

Rework hours

10,000

Setups

Setup hours

6,000

60

Inspection

# of inspections

4,000

15

PPT 14 -12

Value- and Nonvalue-Added


Cost Report (continued)

Activity

ValueAdded Costs

NonvalueAdded Costs

Actual Costs

Welding

$400,000

$ 80,000

$480,000

Rework

----

90,000

90,000

Setups

----

360,000

360,000

Inspection

----

60,000

60,000

$400,000

$590,000

$990,000

Total

PPT 14 -13

Trend Report: Nonvalue-Added Costs

Activity

Nonvalue-Added Costs
2000
2001
Change

Welding

$ 80,000

$ 50,000

$ 30,000

Rework

360,000

200,000

160,000

Setups

90,000

70,000

20,000

Inspections

60,000

35,000

25,000

$590,000

$355,000

$235,000

Total

PPT 14 -14

The Role of Kaizen Standards


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:
(1) the kaizen or continuous improvement
cycle, and
(2) the maintenance cycle.

PPT 14 -15

Improving Performance Through


Benchmarking
Organization A
Cost of Processing a
Purchase Order is
$20

Share
Information

Organization B
Cost of Processing a
Purchase Order is
$15

How do we improve?

PPT 14 -16

Activity-Based Budgeting

Activity flexible
budgeting is the
prediction of what
activity costs will be as
activity output changes.

PPT 14 -17

Flexible Budget: Direct Labor Hours


Cost Formula
Fixed

Direct Labor Hours

Variable10,00020,000

Direct materials

---$10 $100,000$200,000

Direct labor

---8

Maintenance

80,000160,000

$ 20,0003

50,00080,000

Machining

15,0001

25,00035,000

Inspections

120,000---

120,000120,000

50,000---

50,00050,000

Setups
Purchasing
Total
=======

220,000 --- 220,000 220,000


$425,000$22 $645,000$865,000

======= ==========

PPT 14 -18

Activity Flexible Budget


Driver: Direct Labor Hours
Formula
Fixed

Level of Activity

Variable10,00020,000

Direct materials

---$10 $100,000$200,000

Direct labor

---

Subtotal
==

80,000 160,000

$0$18 $180,000$360,000
===

Driver: Machine Hours


Fixed
Maintenance
Machining
Subtotal
======

Variable8,000 16,000
$20,000$5.50$64,000

$108,000

15,000 2.00 31,000

47,000

$35,000$7.50$95,000
====

$155,000
PPT 14 -19

Activity Flexible Budget (continued)


Driver: Number of Setups
Fixed
Inspections
Setups
Subtotal

Variable25

30

$80,000$2,100$132,500
--- 1,800

$143,000

45,000

$80,000$3,900$177,500

54,000
$197,000====== =====

Driver: Number of Orders


Fixed
Purchasing
Total
=======

Variable15,00025,000
$211,000$1 $226,000$236,000
=======

=======

==

$678,000$948,000

PPT 14 -20

Activity-Based Performance Report


Actual Costs
Direct materials

Budgeted Costs

Budget Variance

$101,000

$100,000

Direct labor

80,000

80,000

---

Maintenance

55,000

64,000

9,000 F

Machining

29,000

31,000

2,000 F

Inspections

125,500

132,500

7,000 F

46,500

45,000

1,500 U

220,000

226,000

6,000 F

$657,000
=======

$678,500
=======

$21,500 F
======

Setups
Purchasing
Total

$1,000 U

PPT 14 -21

Variances for the Inspection Activity


Activity

Actual Cost

Budgeted Cost

Variance

$ 82,000

$ 80,000

$2,000 U

43,500

52,500

9,000 F

$125,500
=======

$132,500
=======

$7,000 F
=====

Inspection:
Fixed
Variable
Total

PPT 14 -22