ACTIVITY-BASED MANAGEMENT CHAPTER 12 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER 12 OBJECTIVES Describe how activity-based management and activity-based costing differ Define process value analysis Describe activity-based financial performance measurement Discuss the implementation issues associated with an activity-based management system © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER 12 OBJECTIVES Explain how activity-based management is a form of responsibility accounting, and tell how it differs from financial-based responsibility accounting © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use THE RELATIONSHIP OF ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT • Activity-based management (ABM): a 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 LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 12.1—THE TWO-DIMENSIONAL ACTIVITY-BASED MANAGEMENT MODEL LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PROCESS VALUE ANALYSIS • Fundamental to activity-based responsibility accounting, focuses on accountability for activities rather than costs, and emphasizes the maximization of system wide performance instead of individual performance • Is concerned with (1) driver analysis, (2) activity analysis, and (3) performance measurement LO-2 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PROCESS VALUE ANALYSIS Driver Analysis: Defining Root Causes •Effort expended to identify the factors that are the root causes of activity costs •Root Causes are identified by asking ‘why’ questions • Once the root cause is known, then action can be taken to improve the activity LO-2 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PROCESS VALUE ANALYSIS Activity Analysis: Identifying and Assessing Value Content •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 LO-2 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PROCESS VALUE ANALYSIS Value Added Activities •Necessary to remain in business •Contribute to customer value and/or help meet an organization’s needs •Comply with legal mandates LO-2 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PROCESS VALUE ANALYSIS Value Added Activities •If the following conditions are simultaneously met, a discretionary activity is classified as value-added • 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 costs are the costs to perform value added activities with perfect efficiency LO-2 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FINANCIAL MEASURES OF ACTIVITY EFFICIENCY Activity Capacity Management •Capacity Variances • The activity volume variance is the difference between the actual activity level acquired (practical capacity, AQ) and the value-added standard quantity of activity that should be used (SQ), multiplied by the budgeted activity rate (SP) • The unused capacity variance is defined as the difference between activity availability (AQ) and activity usage (AU), multiplied by the budgeted activity rate (SP) LO-3 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use IMPLEMENTING ACTIVITY-BASED MANAGEMENT • Objectives of activity-based management (ABM) • Improving decision making by providing accurate cost information • Reducing costs by encouraging and supporting continuous improvement efforts LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 12.7—ABM IMPLEMENTATION MODEL LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use IMPLEMENTING ACTIVITY-BASED MANAGEMENT • 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 LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use IMPLEMENTING ACTIVITY-BASED MANAGEMENT Why ABM Implementations Fail •Lack of support of higher-level management •Operating and sales managers not have the expertise to use the new activity information •Resistance to change •Failure to integrate the new system LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FINANCIAL-BASED VERSUS ACTIVITY-BASED RESPONSIBILITY ACCOUNTING • Responsibility accounting is a fundamental tool of managerial control • Objective is to influence behavior in such a way that individual and organizational initiatives are aligned to achieve a common goal or goals LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FINANCIAL-BASED VERSUS ACTIVITY-BASED RESPONSIBILITY ACCOUNTING • Responsibility accounting is defined by four essential elements • • • • Assigning responsibility Establishing performance measures or benchmarks Evaluating performance Assigning rewards LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 12.8—THE RESPONSIBILITY ACCOUNTING MODEL LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FINANCIAL-BASED VERSUS ACTIVITY-BASED RESPONSIBILITY ACCOUNTING • Three types of responsibility accounting systems have evolved over time • Financial-based • Activity-based • Strategic-based LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FINANCIAL-BASED VERSUS ACTIVITY-BASED RESPONSIBILITY ACCOUNTING • Financial–based responsibility accounting system: assigns responsibility to organizational units and expresses performance measures in financial terms • Activity-based responsibility accounting system: Assigns responsibility to processes and uses both financial and nonfinancial measures of performance LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 12.9—RESPONSIBILITY ASSIGNMENTS COMPARED LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 12.10—PERFORMANCE MEASURES COMPARED LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 12.11— PERFORMANCE EVALUATION COMPARED LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 12.12—REWARDS COMPARED LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use END OF CHAPTER 12 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ... classroom use THE RELATIONSHIP OF ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT • Activity-based management (ABM): a 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 LO-1 ©... ANALYSIS Cost Reduction through Activity Management •Kaizen costing: characterized by constant, incremental improvements to existing processes and products •Activity management can reduce costs