Copyright © 2013 Nelson Education Ltd. PowerPoint Presentations for Cornerstones of Cost Accounting First Canadian Edition Adapted by George Gekas Ryerson University Copyright © 2013 Nelson Education Ltd.

ACTIVITY-BASED MANAGEMENT CHAPTER 14 14-2 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. The Relationship of Activity-Based Costing and Activity-Based Management OBJECTIVE 1 Continuous Improvement Process of improving performance by constantly searching for ways to eliminate waste. Activity-Based Management (ABM) Systemwide, integrated approach that focuses management’s attention on activities with the objectives of improving customer value and the profit achieved by providing this value Activity-Based Costing (ABC) Major source of information for activity-based management 14-3 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. The Relationship of Activity-Based Costing and Activity-Based Management OBJECTIVE 1 14-4 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. OBJECTIVE 2 Process Dimension: Process Value Analysis Process Value Analysis (PVA) Fundamental to activity-based 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 14-5 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. OBJECTIVE 2 Process Dimension: Process Value Analysis Driver Analysis The effort expended to identify the factors that are the root causes of activity costs. Activity Analysis The process of identifying, describing, and evaluating the activities an organization performs. 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 Activities can be value-added or non-value-added 14-6 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. OBJECTIVE 2 Process Dimension: Process Value Analysis Value-Added Activities Activities necessary to remain in business Contribute to customer value and/or help meet an organization’s needs Some activities are discretionary but are also value added: Activity produces a change of state Change of state was not achievable by preceding activities Activity enables other activities to be performed Value-Added Costs Costs to perform value added activities with perfect efficiency 14-7 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. OBJECTIVE 2 Process Dimension: Process Value Analysis Non-Value-Added Activities All activities other than those essential to remain in business Fail to produce a change in the product’s state or replicate work because it wasn’t done correctly the first time In manufacturing, five major wasteful and unnecessary activities: Scheduling Moving Waiting Inspecting Storing 14-8 Copyright © 2013 Nelson Education Ltd.

Process Value Analysis OBJECTIVE 2 Process Dimension: Process Value Analysis Activity management can reduce costs in four ways: Activity elimination Activity selection Activity reduction Activity sharing 14-9 Copyright © 2013 Nelson Education Ltd.

Cost Dimension: Financial Measures of Activity Efficiency 3 OBJECTIVE 3 Reporting Value- and Non-Value-Added Costs See Cornerstone 14-1 14-10 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Cost Dimension: Financial Measures of Activity Efficiency OBJECTIVE 3 Kaizen Costing See Cornerstone 14-3 14-11 Copyright © 2013 Nelson Education Ltd.

Internal Benchmarking External Benchmarking Cost Dimension: Financial Measures of Activity Efficiency OBJECTIVE 3 Benchmarking Complimentary approach to Kaizen costing and activity-based management Uses best practices found within and outside the organization as the standard for evaluating and improving activity performance Internal Benchmarking Benchmarking against internal operations External Benchmarking Benchmarking that involves comparison with others outside the organization 14-12 Copyright © 2013 Nelson Education Ltd.

Cost Dimension: Financial Measures of Activity Efficiency 3 OBJECTIVE 3 Activity Flexible Budgeting The prediction of what activity costs will be as activity output changes 14-13 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Cost Dimension: Financial Measures of Activity Efficiency OBJECTIVE 3 14-14 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Cost Dimension: Financial Measures of Activity Efficiency OBJECTIVE 3 14-15 Copyright © 2013 Nelson Education Ltd.

Cost Dimension: Financial Measures of Activity Efficiency 3 OBJECTIVE 3 Activity Capacity The number of times an activity can be performed What should the activity capacity be? How much of the capacity acquired was actually used? 14-16 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Implementing Activity-Based Management OBJECTIVE 4 Activity-Based Management (ABM) Objectives: Improving decision making by providing accurate cost information Reducing costs by encouraging and supporting continuous improvement efforts 14-17 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Implementing Activity-Based Management OBJECTIVE 4 14-18 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Implementing Activity-Based Management OBJECTIVE 4 Systems planning provides the justification for implementing ABM and addresses the following issues: The purpose and objectives of the ABM system The organization’s current and desired competitive position The organization’s 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 14-19 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Implementing Activity-Based Management OBJECTIVE 4 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 14-20 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Activity-Based Responsibility Accounting OBJECTIVE 5 Responsibility Accounting Fundamental tool of managerial control Objective: To influence behaviour in such a way that individual and organizational initiatives are aligned to achieve a common goal or goals Four essential elements: Assigning responsibility Establishing performance measures or benchmarks Evaluating performance Assigning rewards 14-21 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Activity-Based Responsibility Accounting OBJECTIVE 5 14-22 Copyright © 2013 Nelson Education Ltd.

Activity-Based Responsibility Accounting 5 OBJECTIVE 5 Assigning Responsibility 14-23 Copyright © 2013 Nelson Education Ltd.

Activity-Based Responsibility Accounting 5 OBJECTIVE 5 Establishing and Evaluating Performance Measures 14-24 Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd. Activity-Based Responsibility Accounting OBJECTIVE 5 Assigning Rewards 14-25 Copyright © 2013 Nelson Education Ltd.

End of Chapter 14