Hilton Maher Selto

Activity-Based Management McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-3 Activity-Based Management (ABM) Evaluates the costs and values of process activities To identify opportunities to improve efficiency. Activity-Based Costing Valued-Added Analysis Process Improvements, Customer Value, & Reduced Costs =+

5-4? ABM adds: ABM adds: Identification of value-added and non-value-added activities Activity-Based Management 4 Basic Steps  Identify & classify the activities related to the company’s products or services.  Estimate the costs associated with each activity.  Calculate a cost-driver rate for each activity.  Assign activity costs to products using the cost- driver rate. 4 Basic Steps  Identify & classify the activities related to the company’s products or services.  Estimate the costs associated with each activity.  Calculate a cost-driver rate for each activity.  Assign activity costs to products using the cost- driver rate. Identifies the customer perceived value of each activity Identifies opportunities to enhance value-added activities and reduce or eliminate non-value-added activities

Identify and measure the different levels of resource spending 2. Measure the costs of individual activities 3. Identify cost-driver bases and measure activity cost-driver rates 3. Identify cost-driver bases and measure activity cost-driver rates 4. Use cost-driver rates to assign activity costs to products, jobs, services, and projects by multiplying the use of cost driver base(s) by the cost driver rates 4. Use cost-driver rates to assign activity costs to products, jobs, services, and projects by multiplying the use of cost driver base(s) by the cost driver rates 5. Analyze the profitability of products using ABC unit-level and full costing. 5. Analyze the profitability of products using ABC unit-level and full costing. The Steps Of ABC

5-6ActivitiesActivities Create outcomes and consume resources Create outcomes and consume resources VALUE-ADDED ACTIVITIES enhance the value of products and services in the eyes of the customer while meeting the goals of the organization VALUE-ADDED ACTIVITIES enhance the value of products and services in the eyes of the customer while meeting the goals of the organization NON-VALUE-ADDED ACTIVITIES do not contribute to customer perceived value NON-VALUE-ADDED ACTIVITIES do not contribute to customer perceived value The Importance Of Customer Value

5-7 Why do organizations have incentives to eliminate non-value added activities? Why do organizations have incentives to eliminate non-value added activities? Competitors are constantly striving to create more value for customers at lower cost Competitors are constantly striving to create more value for customers at lower cost The organization can apply the freed- up resources to value- added activities or distribute them to the employees of the organization. The organization can apply the freed- up resources to value- added activities or distribute them to the employees of the organization. Competition can appear quickly Non-value Added Activities

5-8 Most Likely Sources of Non- Value-Added Activities

5-9 If the answer is “yes” to both it is value-added. If the answer is “no” to both or either it is non- value-added. YES NO The test for value added activities Identifying Value-Added Activities “Would an external customer encourage the organization to do more of the activity?” “Would an external customer encourage the organization to do more of the activity?” “Would the organization be more likely to reach its goal by performing that activity?” “Would the organization be more likely to reach its goal by performing that activity?”

5-10 VALUE- ADDED VALUE- ADDED NON- VALUE- ADDED NON- VALUE- ADDED Rate on a scale of 1 to 5 Necessary Activities Technological Requirements Technological Requirements Policy Requirements Policy Requirements Regulatory Requirements Regulatory Requirements Neither value-added nor non-value-added How Should An Organization Measure Value-Added?

5-11 Everyone’s knowledge is limited Everyone is potentially biased in his or her response Everyone’s knowledge is limited Everyone is potentially biased in his or her response Use a team approach Use a team approach Who Should Perform The Measurement Activity?

5-12 Twin objectives of ABM Twin objectives of ABM Identify non-value-added activities to be eliminated or reduced Identify non-value-added activities to be eliminated or reduced Identify value-added activities to be enhanced Identify value-added activities to be enhanced Redesign processes to eliminate wasteful spending on non-value-added activities Redesign processes to eliminate wasteful spending on non-value-added activities Tasks Required by Activity- Based Management

5-13 By comparing the cost to the value of the task, we can identify oversupplied non-value-added activities and undersupplied value- added activities. By focusing on those low-value tasks with high resource allocation, we can improve efficiency. Oversupplied non-value-added activities Oversupplied non-value-added activities Sorting Activities By Cost And Value

5-14 Ask “Why?” for each step in the process. Why#1: Appearance and product function requires removal of the excess Why#2: Under high-injection pressure, plastic leaks from the edges of the mold Why#3: High pressure is required to mold the products properly Why#4: The design of the molds permits leakage Why#5: The molds are based on old designs Why do employees need to trim excess plastic from molded products? SOLUTION: Rework or replace old molds with improved molds to eliminate the need for trimming and recycling. Identifying Opportunities For Process Improvement

5-15 Why are we spending so much time on non-value-added record keeping and the correction of recording errors? Why are we spending so much time on non-value-added record keeping and the correction of recording errors? SOLUTION: Install a bar-coding system to mark and track all orders electronically SOLUTION: Install a bar-coding system to mark and track all orders electronically A bar-coding system creates a unique bar code for each order and allows the company to mark and track all orders electronically A bar-coding system creates a unique bar code for each order and allows the company to mark and track all orders electronically Ask “Why?” for each step in the process. Identifying Opportunities For Process Improvement

5-16 After process improvements, total elapsed time has been reduced to 82.2 minutes. If we assume a cost of $10 per hour, what is the cost savings? Identifying Opportunities For Process Improvement

5-17 Time Saved: 286 min min min. ÷ 60 min/hr hrs. Time Saved: 286 min min min. ÷ 60 min/hr hrs. Cost Savings: hrs. × $10/hr. $33.97 Cost Savings: hrs. × $10/hr. $33.97 Identifying Opportunities For Process Improvement

5-18 The Focus of ABC The Focus of ABC The Focus of ABM The Focus of ABM Developing improved product or service costs given current processes Identifying opportunities for improving processes Consider cost-benefits Implementation Of Activity- Based Costing & Management

5-19 What Organizations Adopt ABC and ABM? Companies facing price competition Companies producing many different, complex products from common facilities Implementation Of Activity- Based Costing And Management

5-20 What is the scope of the ABC or ABM project? Pilot Project Organizationwide System Organizationwide System Can You Be Sure That ABC And ABM Will Be Successful? What is a “pilot project”? A project of limited scope that is intended to be a small-scale model of an organizational system. Why use a “pilot project”? Anticipate the linkages across departments, groups and processes. Anticipate the data gathering and reporting requirements.

5-21 What resources are necessary? What resources are necessary? Management Commitment Management Commitment Personnel and Time Personnel and Time Technology Begin with existing commercial software Begin with existing commercial software Significant projects will require a three- to four-person, cross-functional team at least four to six months of full-time effort Educate top management as to cost/benefits Can You Be Sure That ABC And ABM Will Be Successful?

5-22 How can you anticipate and overcome resistance to change? Prevent or Minimize Resistance by: Prevent or Minimize Resistance by: Effects of Culture Education and Training Incentives that Encourage and Reward Change Widespread Sponsorship and Participation Be Sensitive to Differences in National Cultures Can You Be Sure That ABC And ABM Will Be Successful?

5-23 ABC and ABM require information that is not normally available from an organization’s information systems ABC and ABM require information that is not normally available from an organization’s information systems This information can be generated by: Observation Interview Survey Can You Be Sure That ABC And ABM Will Be Successful? How do you gather information?

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