COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
Chapter 12
Study Objectives
1. Describe how activity-based management and activity-based costing differ.
2. Define process value analysis.
3. Describe activity-based financial performance measurement.
4. Discuss the implementation issues associated with an activity-based management system.
5. Explain how activity-based management is a
The Relationship of Activity-Based Costing
and Activity-Based Management
• Activity-based management (ABM) is a
– Systemwide, integrated approach
– Focuses management’s attention on activities with the objectives of improving
• Customer value
• The profit achieved by providing this value
Process Value Analysis
• Process value analysis
– 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:
– Driver analysis – Activity analysis
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.
Process Value Analysis
• Value-added activities
– Necessary to remain in business
– By mandate (e.g., comply with SEC reporting requirements)
– May contain nonessential actions that create unnecessary cost.
• Nonvalue-added activities
Process Value Analysis
• Nonvalue-added activities
– Scheduling
• Uses resources to determine access to processes – Moving
• Uses resources to move inventory among departments – Waiting
• Uses resources while waiting for next process – Inspecting
Process Value Analysis
• Kaizen costing: constant incremental
improvement, including cost reduction through activity management
– Activity elimination
• Focus on eliminating nonvalue-added activities – Activity selection
• Choose among sets of competing strategies – Activity reduction
• Decrease time and resources required by an activity – Activity sharing
Process Value Analysis
• Assessing activity performance
– Financial measures
– Nonfinancial measures
• Dimensions of performance assessment
Financial Measures of Activity
Efficiency
• Reveal the current level of efficiency and
the potential for increased efficiency
– Value- and nonvalue-added activity costs – Trends in activity costs
– Kaizen standard setting – Benchmarking
– Activity flexible budgeting
Activity Activity Driver SQAQ SP
Purchasing Purchasing hours 20,00023,000$20 Molding Molding hours 30,00034,00012 Inspecting Inspection hours 06,000 15 Grinding Number of units 05,000 6
Financial Measures of Activity
Efficiency
Value-added
Financial Measures of Activity
Efficiency
• 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
Financial Measures of Activity
Efficiency
• Benchmarking
– Uses best practices as the standard for evaluating activity performance
• Internal benchmarking
– Benchmarking against the best internal performance
• External benchmarking
Financial Measures of Activity
Efficiency
• Activity flexible budgeting
– Predicted activity costs reflect activity output changes
– Multiple cost drivers require multiple flexible budget formulas
Financial Measures Of Activity
Efficiency
• Activity capacity
– The number of times an activity can be performed
• Activity capacity management
– Measured by activity drivers – Capacity variances
Implementing ABM
Implementing ABM
Implementing ABM
Systems planning provides the justification for
implementing ABM and address the following issues: 1. The purpose and objectives of the ABM system.
2. The organization’s current and desired competitive position.
3. The organization’s business processes and product mix. 4. The timeline, assigned responsibilities, and resources
required for implementation.
Implementing ABM
• Why ABM implementations fail
– Lack of support of higher-level management. – Failure to maintain support from higher-level
management.
– Resistance to change.
Financial-Based vs Activity-Based
Responsibility Accounting
• Assigning responsibility
– Financial-based
• Focuses on functional organizational units and individuals
• Emphasis on optimum results at the local level
– Activity-based
• Focuses on processes and teams
Financial-Based vs Activity-Based
Responsibility Accounting
• Establishing performance measures
– Financial-based
• Budgeting and standard costing
• Measures are objective and financial; stable over time
– Activity-based
Financial-Based vs Activity-Based
Responsibility Accounting
• Evaluating performance
– Financial-based
• Compare actual outcomes with budgeted outcomes
– Activity-based
• Financial perspective
Financial-Based vs Activity-Based
Responsibility Accounting
• Assigning rewards
– Both systems
• Management policy and discretion
– Financial-based
• Individual achieves or beats budget standards • Profit-sharing (individual)
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
