Ch 12 - Activity Based Mgmt

competitive benchmarking

**most helpful -compare actual performance with competitors ex. food city vs. kroger

Assume that all of the activities in the example add value except for setups, inspections, and rework. Why are these three activities classified as non-value added?

- Setups: caused by inefficiencies in our process - Inspections: more like a state-detection activity - Rework: should have been achieved through prior activity

Types of value added activities:

- mandated: required to operate as a business (ex. tax compliance, sec compliance, OSHA (Occ. Safety and Health Assoc), environmental compliance - discretionary: adding value from customer perspective

Implementation Issues

-Implementing activity-based management concepts in most organizations requires more information than is needed for a traditional financial based system. If the implementation is to be successful, operating personnel must understand the objectives of the system and the value that can be obtained from the system. -Change in organizations requires support from higher levels of management, and if this support is not present, the change is likely to fail. Activity-based management is a major change in most organizations, and higher levels of management need to support the change.

internal benchmarking

-benchmarking against other interior operations -advantages: info. should be available and easily shared

external benchmarking

-comparing co. performance with others outside of the organization

Generic benchmarking

-comparing performance with best practices of non-competitors outside the industry

functional benchmarking

-comparing performance with those in he same industry but not in the same market ex. Food city vs. Piggly Wiggly

Differences in financial based and activity-based responsibility systems

1. Financial based responsibility systems assign responsibility to organization units such as departments while activity based systems assign responsibility to processes. 2. Financial-based systems measure performance using financial measures while activity-based management systems use both financial and operational measures. 3. Performance measures are based on organizational units in financial systems but they are process oriented in activity based systems. 4. Rewards are often individual rewards in a financial based system, but they are group rewards with an activity based systems. Gainsharing, where all employees share from gains in profitability, may be used in an activity based system.

Types of Benchmarking

1. Internal 2. External a. competitive b. functional c. generic

Process value analysis includes:

1. driver analysis, 2. performance measurement, and 3. activity analysis. ($ value added or Non-value added)

The authors of the text identify three conditions that should be met before a discretionary activity is classified as value added:

1. the activity produces a state of change (does NOT include rework/quality control activities) 2. the change of state was not achievable by preceding activities. 3. the activity enables other activities to be performed.

What are performance measures for activities?

1. time measures 2. quality measures 3. efficiency measures

What is a trend report and when does it show

A trend report for non-value added costs will show if activity improvement initiatives are reducing costs. The trend report would compare non-value added costs for two periods see pg 9

What is activity analysis?

Activity analysis is an examination of activities and processes to identify and assess their value content. Often, activities are classified as value-added or non-value added.

How does activity-based management differ from activity-based costing?

Activity based costing (ABC) refers to determining the cost of products, projects, or other cost objects. Activity-based management (ABM) focuses on using information about activities to manage activities and reduce costs.

How can a company use activity analysis to reduce costs?

Activity elimination Activity selection Activity reduction Activity sharing

benchmarking

Benchmarking is used in activity-based management to identify goals for improving activities and processes. It uses best practices found inside and outside the organization as the standard for evaluating and improving activity performance.

What is driver analysis?

Driver analysis refers to determining why specific activities are performed. Driver analysis should answer the question, "What is the root cause of the activity?" For example, why is it necessary to move parts and components around the factory? *the layout of the factory determines how much movement occurs

What are non-value added activities?

Non-value added activities are those that are not necessary and can be identified by their failure to satisfy any one of the three defining conditions. Examples of non-value added activities are scheduling, moving, waiting, inspecting, and storing. **All costs associated with ^^^ are non-value added costs

What causes non-value added costs and where are they incurred?

Non-value added activities result in non-value added costs, but value added activities can also have non-value added costs if they are performed inefficiently or if they are caused by a non-value added activity.

Be able to draw the activity based costing model vs. the process view of the ABC framework and names differences.

See pg 1

How do these performance measures differ from traditional performance measures?

Traditional measures focus on 1. controllable costs 2. actual vs. standard (variances) 3. financial measures

ABC cross

When the cost assignment view and the process view are combined, horizontal: process view Vertical: cost assignment **be able to draw on pg 2

quality measures

ability to produce quality parts and doing activities right the 1st time

activity sharing

achieve economies of scale by sharing with other processes

What is activity based mgmt

an approach to improving customer value and profitability based on managing the activities of the firm.

activity elimination

get rid of non-value added activities

How to calc NON value added costs for committed resources

i.e. fixed costs standard price per activity driver unit multiplied by the difference between the activity driver capacity acquired (i.e. practical capacity) and the value-added standard quantity of the activity driver. SP (AQa aka capacity - SQ)

How to calc NON value added costs for a flexible resource

i.e. variable costs, standard price per activity driver unit multiplied by the difference between the actual quantity used and the value-added standard quantity of the activity driver SP (AQu - SQ)

Activity Based Flexible Budgeting Example: flexible budget

pg 5

complete cost report example

pg 8

activity reduction

reduce time and resources used by an activity

efficiency measures

relationship b/t inputs and outputs

activity selection

select activities with lowest cost that achieve similar results

time measures

time required to perform an activity (non-financial measure)

T/F: Process value analysis is used to implement activity-based management concepts.

true

T/F: The difference between the actual costs and these budgeted costs is a spending variance.

true

T/F: cost reduction techniques are used in Kaizen costing to continually strive for improvements in costs.

true

What are value added activities?

typically activities that add value from a customer perspective

How to calc value-added costs for a specific activity

value-added standard quantity for the activity driver multiplied by the standard price per activity driver unit. (SQ * SP)