1. Lecture 4: Activity Based Management
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2. Objectives
Describe Activity-based management and explain its relationship to ABC
Explain process value analysis
Explain activity performance measurement
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3. Activity Based Management
Once product costs
are obtained using ABC,
info can be used in decision making
Called Activity Based Management
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4. The Definition: ABM
ABM is 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.
Improving process means improving the way activities perform Management activities, not costs, is the key to succesfull control of a firm
ABC is the major source of information for activity-based management.
Activity-based management encompasses both product costing and process value analysis.
The activity-based management model has two dimension: a cost dimension and a process dimension.
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5. The Two-Dimensional Activity-Based Management Model
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6. The Objectives: ABM Improving decision making
Reducing costs by continuous improvement
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7. Process Dimension
Processes are the way things are done to change process has to change the way things done
Methods of changing processes:
Process improvement
Process innovation
Process creation
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8. Process Value Analysis
Process value analysis is fundamental to activity-based responsibility accounting
Focuses on accountability for activities rather than costs
emphasizes the maximization of systemwide performance instead of individual performance.
Process value analysis is concerned with:
(1) Driver analysis
(2) Activity analysis
(3) Performance measurement
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9. Process Value Analysis
Driver analysis is the effort expended to identify the factors that are the root causes of activity costs.
Activity analysis is the process of identifying, describing, and evaluating the activities an organization performs.
Activity analysis 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.
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10. Driver Analysis
Process of identifying the factors that are the root causes for costs of an activity (searching for root causes)
Activity input : resources consumed by the activity in producing output
Activity output: result or product of an activity
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11. Process Value Analysis
Value-Added Activities: are those activities necessary to remain in business.
Mandatory-value added activities
Discretionary-value added activities
It has to meet all 3 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.
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12. Process Value Analysis
Non-value-added activities :
are the unnecessary activities. These activities should be eliminanated.
Five major non-value added activities:
scheduling,
moving
waiting
inspecting
storing
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13. Activity Analysis 1. Activity elimination 2. Activity selection
Activity management can reduce costs in four ways:
1. Activity elimination
2. Activity selection
3. Activity reduction
4. Activity sharing
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14. Value-Added Activities Non-Value-Added Activities
Cost Reduction
Activity Selection
Activity Sharing
Value-Added Activities
Activity Reduction
Activity Elimination
Non-Value-Added Activities
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15. Measures of Activity Performance
To assess how well an activity was performed and the result achieved
Covered both financial and non-financial forms
3 major dimensions: Efficiency,Quality and Time
Financial measures of activity efficiency include:
Value-added and nonvalue-added activity costs
Trends in activity costs
Kaizen standard setting
Benchmarking
Life cycle costing
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16. Formulas for Value- and Non-Value-Added Costs
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17. Value- and Nonvalue-Added Cost Reporting
Activity Activity Driver SQ AQ SP
Welding Welding hours 10,000 8,000 $40
Rework Rework hours 0 10,000 9
Setups Setup hours 0 6,000 60
Inspection Number of inspections 0 4,000 15
Value-added standards call for their elimination
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18. Value- and Nonvalue-Added Cost Report
Value-Added Nonvalue Net
Activity Costs Added Costs Costs
Welding $400,000 $80,000 $480,000
Rework 0 90,000 90,000
Setups 0 360, ,000
Inspection , ,000
Total $400,000 $590,000 $990,000
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19. Trend Report: Nonvalue-Added Costs
Activity Change
Welding $80,000 $ 50,000 $ 30,000
Rework 90,000 70,000 20,000
Setups 360, , ,000
Inspection 60, , ,000
Total $590,000 $355,000 $235,000
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20. BENCHMARKING
Use the best practices as the standard for evaluating activity performance
Internal benchmarking
External Benchmarking
competitive
Functional
 Generic
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21. Why ABM Implementations Fail
Implementing Activity-Based Management
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.
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