Using ABM to identify non-value added activities and costs
Achieving cost reduction
Important Concepts related to Activity Based Management Target Costing Kaizen Costing Reengineering Reverse Engineering Benchmarking
Activity Based Costing Examples and Exercises
Responsibility Accounting
Use of a single cost driver to allocate all costs in a production facility
With multiple products, the results is.
Broad Averaging OK when Indirect Costs & OHs were a relatively low share of total production costs
When only one or two products were produced by the manufacturing process (i.e. no product diversity Over costing and under costing of products, incorrect information, product subsidization and poor decision making
Activity Based Management is the use of Activity Based Costing to improve operations throughout the organization and focus on value creation through the elimination of non-value added activities and increased emphasis on value added activities
Non-value added activities are operations that are: (a) Unnecessary and dispensable (b) Necessary but efficient and improvable
What is Activity Based Management? Identify all activities needed in a production process
Identify non-value added activities using the following criteria to examine them:
Is the activity necessary Is the activity efficiently performed Is the activity sometimes value added and at other times non- value added? (Move time: It may be necessary to move work in process or sub-assemblies around, but unnecessary to move raw materials from one location to another)
Understanding activity linkages, root causes and triggers
Establishing performance measures
Reporting non-value added costs
Steps in Activity Based Management Cost Reduction is achieved using the following steps:
Activity Reduction
Activity Elimination
Activity Selection selecting more efficient activities
Activity Sharing (example use of common parts in several products as opposed to design of products using unique parts in each case)
Achieving Cost Reduction Concepts related to Activity Based Management Target Costing Refers to designs of a product and the costs used to produce it. First a market price is determined or estimated and then working backwards cost reduction is targeted to meet a desired profit.
Kaizen Costing Manufacturing cost reduction practices that focus on continuous improvement
Reengineering Focuses on redesign of a product or process to find new and creative ways to accomplish an objective Concepts related to Activity Based Management (continued) Reverse Engineering This process focuses on analyzing competitor products and taking them apart to find more cost effective ways of manufacturing the same product and thereby increasing profitability and gaining market share while still avoiding expensive initial R&D costs
Benchmarking Analyzing industry or competitor best practices to set as performance measures or processes to achieve results Responsibility Accounting Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts, or segments are referred to as responsibility centers that include:
Revenue Centers Cost Centers Profit Centers Investment Centers Responsibility Accounting Unit Generates Revenues & Costs and makes investments, acquires assets etc Unit Generates Revenues & Costs Unit generates Cost Unit Generates Revenue Revenue Center Cost Center Investment Center Profit Center Responsibility Accounting Advantages and disadvantages of Responsibility Accounting Enables large organizations to be managed by decentralization performance measurement
In addition, assigning responsibility to lower level managers allows higher level managers to pursue other activities such as long term planning and policy making.
It also provides a way to motivate lower level managers and workers.
However, this emphasis on the performance of individuals and individual segments creates what some critics refer to as the "stovepipe organization. Information flows vertically, rather than horizontally. Individuals in the various segments and functional areas are separated and tend to ignore the interdependencies within the organization. Segment managers and individual workers within segments tend to compete to optimize their own performance measurements rather than working for overall organizational welfare Illustration of Stovepipe Syndrome