CONCEPTUAL FRAMEWORK OF AN ABC&M SYSTEM VALUE CHAIN : THE CHAIN OF AN ENTERPRISE’S ACTIVITIES THAT IS PERFORMED TO ADD VALUE TO INPUTS IN ORDER TO ARRIVE AT THE FINAL OUTPUTS WHICH ARE PURCHASED AND USED OR CONSUMED BY CUSTOMERS IF AN ENTERPRISE WISHES TO ENJOY A COMPETITIVE ADVANTAGE, AN ENTERPRISE NEEDS TO HAVE A VALUE CHAIN IN WHICH (DEFINED BY PORTER) ; -THERE ARE A MINIMUM NUMBER OF ACTIVITIES - ALL ACTIVITIES ARE EFFECTIVE ; AND - ALL ACTIVITIES ARE PEFORMED AT A RELATIVELY LOW COST

Figure 2.1 : Porter’s value chain MARGIN FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT SUPPORT ACTIVITIES OPERATIONSOUTBOUND LOGISTICS MARKETING AND SALES SERVICE PRIMARY ACTIVITIES OUTBOUND LOGISTICS

FIGURE 2.2 REFLECTS A FEW PROCESSES AND INDICATES WHERE THE ACTIVITIES RELATING TO THEM ARE PERFORMED. PROCUREMENT OF RAW MATERIALS COULD REQUIRE THE FOLLOWING ACTIVITIES : REQUISTIONING, ORDERING, INSPECTION (OF GOODS ON RECEIPT), ISUING OF GOODS RECEIVED NOTES, CONVEYING TO STORES, STORING, CHECKING OF CREDITORS’ INVOICES, AND SETLING CREDITORS’ ACCOUNT. PROCESS : A LOGICAL SERIES ACTIVITIES WHICH CAN BE LINKED TO PRODUCE A RESONABLY HOMOGENOUS OUTPUT OR A SIGNIFICANT AND COMPLETE OUTPUT (NOT NECESSARILY A PRODUCT) PROCESS

ProcessFunctions (in departments) WarehousingProductionMarketingDistributionAdmin Procurement Manufacturing Storing Marketing Selling Delivering Invoicing Debit collection xxxxxx xx x xxx xxxxx xxxx x x xxxxxxx xxx xx x xxx Figure 2.2 : Process matrix

FIGURE 2.3 ILLUSTRATES HOW THE SELLING PROCESS IS DEDUCED FROM THE STRUCTURE BY UTILISING THE UNDERLYING ACTIVITIES. ACTIVITY ; ALL THE ACTIONS OR TASKS TO CARRY OUT A CERTAIN WORK ( THE ACTIVITY TO PACK FINISHED GOODS IS CALLED PACKING). ACTIVITY IS USED AS BASIS OF MEASUREMENT OF COST AND PERFORMANCE IN ABC SYSTEM ( ACTIVITY IS THE FOCAL POINT OF TOTAL COST MANAGEMENT) EXAMPLES OF ACTIVITIES : BUYING, RECEIVING, STORING, PACKING, SELLING, INVOICING, DISTRIBUTION, DEBT COLLECTION, CUSTOMER SERVICING. ACTIVITIES CONSUME RESOURCES; IN OTHER WORDS, ACTIVITIES CAUSE COSTS. IN TURN PRODUCTS CONSUME ACTIVITIES

Fugure 2.3 : “Process” in a traditional functional organisation structure MANAGING DIRECTOR SALES MANAGER ADMIN DIRECTOR PROCDUCTION DIRECTOR SALES DIRECTOR SALES ADMIN CONTROLLER TRANSPORT MANAGER WAREHOUSE MANAGER SALESMAN CREDIT CONTROLLER CESPATCH CLERK SALES ORDER CLERK INVENTORY CONTROLLER CREDIT MANAGER ORGNISATIONORGNISATION

OBTAIN ORDER APPROVE CREDIT RECORD ORDER APPROVE ORDER DETERMINE STOCK AVAILABILITY SCHEDULE DELIVERY A C T I V I T Y INITIATE SALE DELIVER GOODS CHARGE CUSTOMER RECEIVE CASH SELL P R O C E S S

FIGURE 2.4 : STRUCTURAL ANALYSIS OF A BUSINESS VALUE CHAIN PROCESS BUSINESS PROCESS ACTIVITY TASK Primary processes are performed to design, produce, market, deliver, and support products and services Secondary processes enhance the efficiency and effectiveness of the primary processes A group of interdependent activities which are activated by an event What the business does Activities consume resources Products or services consume activities How an activity is performed

TABLE 2.1 : ACTIVITY COST MATRIX ACTIVITY CENTRE ReceivingWarehousingMachine set-up InspectionMaintenance Salaries Power Rent Insurance Consumables Depreciation

AFTER HAVING IDENTIFIED THE ACTIVITIES THAT INCUR COSTS AND HAVING ASSIGNED THE COSTS TO THE RELEVANT ACTIVITIES, THE NEXT STEP IS TO DETERMINE THE JUSTIFIED BASES ON WHICH THE COSTS APPROPRIATED TO THE ACTIVITY CENTRES ARE TO BE TRACED TO THE ORGANIZATION’S PRODUCTS. HENCE, IN TERMS OF ABC, THE COST OF A PRODUCT COMPRISES THE COST OF THE RAW MATERIALS PLUS THE COST OF ALL THE ACTIVITIES REQUIRED TO PRODUCE THE PRODUCT. RESOURCES OR COST ELEMENTS ARE ECONOMIC ELEMENTS DIRECTED TOWARDS THE PERFORMANCE OF ACTIVITIES. RESOURCES ARE TRACED TO ACTIVITIES UTILISING THE RESOURCE COST DRIVER. EXAMPLES OF RESOURCES ARE LABOR, POWER AND DEPRECIATION. THE COST DRIVERS COULD BE TIME (FOR LABOR), KILOWATTS CONSUMED (FOR POWER) AND VALUE OF EQUIPMENT EMPLOYED (FOR DEPRECIATION).

PRFORMANCE MEASUREMENT (QUALITY, TIME, COST AND FLEXIBILITY) IS CONSIDERED MORE USEFUL THAN PURE FINANCIAL EVALUATION TO EVALUATE OVERALL ORGANISATIONAL PERFORMANCE. QUALITY MANAGEMENT, PRODUCTIVITY MANAGEMENT SYSTEMS AND CAPACITY MANAGEMENT SYSTEMS CAN THUS BE INTEGRAL PARTS OF AN ACTIVITY-BASED MANAGEMENT SYSTEM COST DRIVERS CAN BE DEFINED AS THOSE FACTORS OR TRANSACTIONS THAT ARE SIGNIFICANT DETERMINANTS OF COST (THE OUTPUT OF AN ACTIVITY). EXAMPLE COST DRIVERS : -THE NUMBER OF PURCHASE ORDERS DRIVES THE COSTS OF THE PURCHASING DEPARTMENT. -THE NUMBER OF GOODS RECEIVED NOTES DRIVES THE COSTS OF THE RECEIVING DEPARTMENT. -THE NUMBER OF ITEMS IN STOCK DRIVES THE COSTS OF WAREHOUSING

Figure 2.5 : Activity-based costing (CAM-I) RESOURCES ACTIVITIES COST OBJECTS PERFORMANCE MEASURES COST DRIVERS COST ASSIGNTMENT VIEW PROCESS VIEW

COST OBJECTS : THE FOLLOWING COST OBJECTS, OTHER THAN PRODUCTS, ARE TYPICALLY FOUND IN BUSINESS : -SERVICES -MARKETING CHANNELS -DISTRIBUTION CHANNELS -CUSTOMERS -PROCESSES -ACTIVITIES. -PROJECTS -CONTRACTS OR OTHER WORK UNITS

TABLE 2.2 : THE BOA OF A SUBASSEMBLY SequenceActivityUnits consumed (of output measure) Production planning Buying Receiving Quality inspection – components Assembling Quality inspection – assembly Storage

BILL OF ACTIVITIES (BOA) : DESCRIPTION OF THE ROUTING THE PRODUCT (OR OTHER COST OBJECT) TAKES THROUGH THE ACTIVITIES IN ITS PATH TOWARD COMPLETION. TABLE 2.2 ILLUSTRATES THAT COST OF A SUBASSEMBLY BY THE ABOVE ACTIVITIES. THE ASSEMBLY TYPICALLY CONSUMES : -TWO UNITS OF PRODUCTION PLANNING -SIX UNITS OF BUYING (MAYBE THE NUMBER OF ORDERS) -TWELVE UNITS OF RECEIVING (MAYBE THE NUMBER OF GRNs -FOUR UNITS OF COMPONENT INSPECTION -EIGHTS UNITS OF ASSEMBLING -THREE UNITS OF FINAL QUALITY INSPECTION; AND -TWNTY UNITS OF STORAGE (MAYBE SQUARE METRES OR DAYS)