Cost management accounting and control 6e by hansen mowen guan chapter 12

Process Value Analysis• Process value analysis – Fundamental to activity-based responsibility accounting – Focuses on accountability for activities rather than costs – Emphasizes the m

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 12 Activity-Based Management

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

form of responsibility accounting, and tell how it

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

• ABC is the major source of information for

activity-based management

The Relationship of ABC and ABM

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

– Performance measurement

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.

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

– All activities other than those essential to

remain in business

Process Value Analysis

Process Value Analysis

• Kaizen costing: constant incremental

improvement, including cost reduction through activity management

Process Value Analysis

• Assessing activity performance

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 capacity management

Financial Measures of Activity

Efficiency

Activity Activity Driver SQAQ SP

Purchasing Purchasing hours 20,00023,000$20

Financial Measures of Activity

Efficiency

Value-added standards call for elimination

Financial Measures of Activity

Efficiency

Financial Measures of Activity

Efficiency

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

• Kaizen (continuous improvement) cycle

• Maintenance cycle

Financial Measures of Activity

Efficiency

Financial Measures of Activity

Efficiency

• Benchmarking

– Uses best practices as the standard for

evaluating activity performance

Financial Measures of Activity

Efficiency

• Activity flexible budgeting

– Predicted activity costs reflect activity output changes

– Multiple cost drivers require multiple flexible budget formulas

– Describe both flexible and committed

resources

Financial Measures of Activity

Efficiency

Financial Measures of Activity

Efficiency

Financial Measures of Activity

Efficiency

Financial Measures of Activity

Efficiency

Financial Measures of Activity

Efficiency

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

• Activity volume variance

• Unused capacity variance

Financial Measures of Activity

Efficiency

Implementing ABM

(continued on next slide)

Implementing ABM

(continued from previous slide)

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.

5 The ability of the organization to implement, learn, and

use new information.

Implementing ABM

• 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

Financial-Based vs Activity-Based

Responsibility Accounting

• Focuses on processes and teams

• Emphasis on systemwide optimization

Financial-Based vs Activity-Based

Responsibility Accounting

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

• Measures are process-orientated; structured to support change

Financial-Based vs Activity-Based

Responsibility Accounting

Financial-Based vs Activity-Based

Responsibility Accounting

Financial-Based vs Activity-Based

Responsibility Accounting

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

End Chapter 12