1. Activity- and Strategy-Based Responsibility Accounting
CHAPTER

2. After studying this chapter, you should be able to:
Objectives
1. Compare and contrast functional-based, activity-based, and strategic-based responsibility accounting systems.
2. Explain process value analysis.
3. Describe activity performance measurement.
4. Discuss the basic features of the Balanced Scorecard.
After studying this chapter, you should be able to:

3. Responsibility Accounting Model
The responsibility accounting model is defined by four essential elements:
Assigning responsibility
Establishing performance measures or benchmarks
Evaluating performance
Assigning rewards

4. Types of Responsibility Accounting
Management accounting offers the following three types of responsibility accounting systems.
Functional-based
Activity-based
Strategic-based

5. Based Responsibility Accounting System
Functional-
Based Responsibility Accounting System
A functional-based responsibility accounting system assigns responsibility to organizational units and expresses performance measures in financial terms.
It is the responsibility accounting system that was developed when most firms were operating in relatively stable environments.

6. Elements of a Functional-Based Responsibility Accounting System

7. Responsibility Is Defined
Individual in Charge
Organizational Unit
Responsibility Is Defined
Operating Efficiency
Financial Outcomes
Performance Measures Are Established
Unit Budgets
Standard Costing
Static Standards
Currently Attainable Stds.
Performance Is Measured
Financial Efficiency
Controllable Costs
Actual vs. Standard
Financial Measures
Individuals Are Rewarded Based on Financial Performance
Promotions
Bonuses
Profit Sharing
Salary Increases

8. Based Responsibility Accounting System
Activity-
Based Responsibility Accounting System
An activity-based responsibility accounting system assigns responsibility to processes and uses both financial and nonfinancial measures of performance.
It is the responsibility accounting system developed for those firms operating in continuous improvement environments.

9. Elements of an Activity-Based Responsibility Accounting System

10. Responsibility Is Defined
Process
Responsibility Is Defined
Team
Value Chain
Financial
Performance Measures Are Established
Optimal
Dynamic
Process Oriented
Value-Added
Performance Is Measured
Time Reductions
Quality Improvement
Cost Reductions
Trend Measures
Individuals Are Rewarded Based on Multidimensional Performance
Promotions
Bonuses
Gain- Sharing
Salary Increases

11. Based Responsibility Accounting System
Strategy-
Based Responsibility Accounting System
A strategic-based responsibility accounting system (Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives:
The financial perspective
The customer perspective
The process perspective
The infrastructure (learning and growth) perspective

12. Elements of a Strategy-Based Responsibility Accounting System

13. Responsibility Is Defined
Customer
Responsibility Is Defined
Financial
Process
Infrastructure
Performance Measures Are Established
Communica-tion Strategy
Balanced Measures
Alignment of Objectives
Link to Strategy
Performance Is Measured
Financial Measures
Customer Measures
Process Measures
Infrastructure Measures
Individuals Are Rewarded Based on Multidimensional Performance
Promotions
Bonuses
Gain- Sharing
Salary Increases

14. Activity-Based Management (ABM)
Activity-based management (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.
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.

15. Activity-Based Management Model
Cost Dimension
Resources
Process Dimension
Driver Analysis
Why?
Activities
What?
Performance Analysis
How well?
Products and Customers

16. Process Value Analysis
Process value analysis is 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
Activity performance measurement

17. Activity analysis should produce four outcomes:
Activity analysis is the process of identifying, describing, and evaluating the activities an organization performs.
Activity analysis should produce four outcomes:
What activities are done.
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.

18. Value-Added Activities
Those activities necessary to remain in business are called value-added activities.
Value-Added Activities

19. Value-Added Activities
Activities needed to comply with the reporting requirements, such as the SEC, are value-added by a mandate.
Value-Added Activities

20. 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.
Value-Added Activities

21. Nonvalue-Added Activities
All activities other than those essential to remain in business are referred to as nonvalue-added activities.
Nonvalue-Added Activities

22. Nonvalue-Added Activities
Scheduling
Moving
Waiting
Inspecting
Storing
Nonvalue-Added Activities

23. Activity Analysis Can Reduce Costs in Four Ways:
Activity elimination
Activity selection
Activity reduction
Activity sharing

24. Efficiency Quality Time
Measures of Activity Performance
Efficiency
Quality
Time

25. 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
Life-cycle costing

26. 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

27. 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

28. Formulas Value-added costs = SQ x SP
Nonvalue-added costs = (AQ – SQ)SP
Where SQ = The value-added output level of an activity
SQ = The standard price per unit of activity output measure
AQ = The actual quantity used of flexible resources or the practical activity capacity acquired for committed resources

29. Value- and Nonvalue-Added Cost Report
Value-Added Nonvalue Actual
Activity Costs Added Costs Costs
Welding $400,000 $ - 80,000 $320,000
Rework 0 90,000 90,000
Setups 0 360, ,000
Inspection , ,000
Total $400,000 $430,000 $830,000

30. 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 $430,000 $355,000 $235,000

31. 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.

32. Kaizen Cost Reduction Process
Check
Check
Act
Act Do Do
Plan
Search
Lock in
Standard
Kaizen Subcycle
Maintenance Subcycle

33. Benchmarking uses best practices as the standard for evaluating activity performance.

34. Activity Capacity Management
Activity capacity is the number of times an activity can be performed.

35. Activity Capacity Variance
AQ = Activity capacity acquired (practical capacity)
SQ = Activity capacity that should be used
AU = Actual usage of the activity
SP = Fixed activity rate
SP x SQ
$2,000 x 0 $0
SP x AQ
$2,000 x 60
$120,000
SP x AU
$2000 x 40
$80,000
Activity
Volume Variance
$120,000 U
Unused
Capacity Variance
$40,000 F

36. Life-Cycle Cost Commitment Curve
100 90 80 70 60 50 40 30 20 10
Cost Commitment Curve
90 percent of life-cycle costs are committed at this point
Planning Design Testing Production Logistics

37. Target Costing
A target cost is the difference between the sales price needed to capture a predetermined market share and the desired per-unit profit.
Example: Current product specifications and the targeted market share call for a sales price of $250,000. The required profit is $50,000 per unit. The target cost is computed as follows:
$250,000 – $50,000 = $200,000

38. Target-Costing Model Target Price Market Share Objective
Product Functionality
Target Profit
Target-Costing Model
Target Cost
Product and Process Design NO
Target Cost Met?
Produce Profit
YES

39. Unit Cost and Price Information for New Product
Life-Cycle Costing: Budgeted Costs and Income
Unit Cost and Price Information for New Product
Unit production cost $ 6
Unit life-cycle cost
Unit whole-life cost
Budgeted unit selling price

40. Development costs $200,000 ---- ---- $ 200,000
Budgeted Costs
Item Item Total
Development costs $200, $ 200,000
Production costs ---- $240,000 $360, ,000
Logistic costs , , ,000
Annual subtotal $200,000 $320,000 $480,000 $1,000,000
Postpurchase costs , , ,000
Annual total $200,000 $400,000 $600,000 $1,200,000
Units produced 40,000 60,000
Note: The post purchase costs are costs incurred by the customer and are not
included in the budgeted income e statement.

41. Budgeted Product Income Statements
Annual Cumulative
Year Revenues Costs Income Income
Budgeted Product Income Statements
$200,000 -$200,000 -$200,000
2004 $600, , , ,000
, , , ,000

42. Performance Report for Life-Cycle Costs
Year Item Actual Costs Budgeted Costs Variance
2003 Development $190,000 $200,000 $10,000 F
2004 Production 300, ,000 60,000 U
Logistics 75,000 80,000 5,000 F
2005 Production 435, ,000 75,000 U
Logistics 110, ,000 10,000 F
Analysis: Production costs were higher than expected because insertions of diodes and integrated circuits also drive costs (both production and postpurchase costs).
Conclusion: The design of future products should try to minimize total insertions.

43. The Balanced Scorecard
The Balanced Scorecard translates an organization’s mission and strategy into operational objectives and performance measures for four different perspectives:
The Balanced Scorecard
The financial perspective
The customer perspective
The internal business process perspective
The learning and growth perspective

44. Strategy, according to Robert Kaplan and David Norton, is defined as
“ choosing the market and customer segments the business unit intends to serve, identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.”

45. Strategy-Translation Process
Vision and Strategy
Financial
Infrastructure
Customer
Process
Objectives
Measures
Strategy-Translation Process
Targets
Initiatives

46. Testable Strategy Illustrated
Increase Sales
Increase Profits
Financial
Increase Customer Satisfaction
Increase Market Share
Customer
Reduce Defective Units
Redesign Products
Process
Testable Strategy Illustrated
Quality Training
Infra-structure

47. Summary of Objectives and Measures: Financial Perspective
Objectives Measures
Revenue Growth:
Increase the number of new Percentage of revenue products from new products
Create new applications Percentage of repeat customers
Develop new customers and Percentage of revenue from
markets new sources
Adopt a new pricing strategy Product and customer profitability

48. Objectives Measures
Cost Reduction:
Reduce unit product cost Unit product cost
Reduce unit customer cost Unit customer cost
Reduce distribution channel cost Cost per distribution channel
Asset Utilization:
Improve asset utilization Return on investment
Economic value added

49. Summary of Objectives and Measures: Customer Perspective
Objectives Measures
Core:
Increase market share Market share (percentage of
market)
Increase customer retention Percentage of repeat customers
Increase customer acquisition Number of new customers
Increase customer satisfaction Ratings from customer
surveys
Increase customer profitability Customer profitability

50. Objectives Measures
Performance Value:
Decrease price Price
Decrease postpurchase costs Postpurchase costs
Improve product functionality Ratings from customer
surveys
Improve product quality Percentage of returns
Increase delivery reliability On-time delivery percentage
Aging schedule
Improve product image and Ratings from customer
reputation surveys

51. Actual Conversion Cost per Unit Theoretical Conversion Cost per Unit
Standard costs per minute = $1,600,000/400,000
= $4 per minute
Actual cycle time = 60 minutes/10 units
= 6 minutes per unit
Actual conversion costs = $4 x 6
= $24 per unit
Theoretical Conversion Cost per Unit
Theoretical cycle time = 60 minutes/12 units
= 5 minutes per unit
Theoretical conversion
costs = $4 x 5
= $20 per unit

52. Summary of Objectives and Measures: Process Perspective
Objectives Measures
Innovation:
Increase the number of new Number of new products vs.
products planned
Increase proprietary products Percentage of revenue from
proprietary products
Decrease new product Time to market (from start
development time to finish)

53. Objectives Measures
Operations:
Increase product quality Quality costs
Output yields
Percentage of defective units
Increase process efficiency Unit cost trends
Output/input(s)
Decrease process time Cycle time and velocity
MCE
Postsales Service:
Increase service quality First-pass yields
Increase service efficiency Cost trends
Decrease service time Cycle time

54. Summary of Objectives and Measures: Learning and Growth Perspective
Objectives Measures
Increase employee capabilities Employee satisfaction ratings
Employee turnover percentage
Employee productivity
(revenue/employee)
Hours of training
Strategic job coverage ratio
(percentage of critical job
requirements filled)

55. Objectives Measures
Increase motivation and Suggestions per employee
alignment Suggestions implemented per
employee
Increase information systems Percentage of processes with
capabilities real-time feedback
capabilities
Percentage of customer-facing
employees with on-line
access to customer and
product information

56. Chapter Ten
The End