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Broad Averaging

Overview of Activity Based Management



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

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