Chapter 12: Activity-Based Management

Kaizen 5S analysis

1) sort - eliminate all unnecessary activities and resources 2) set in order - resources needed for carrying out the planned work activities are located so that they are easily accessible and avoid unnecessary movement 3) sweep - to keep the work area clean/organized 4) standardize - the locking-in of the best practices 5) sustain - the new way of operating must be maintained

non-value-added costs

= (actual level of activity's output (AQ) - value-added level of activity's output (SQ) x standard price (SP)

activity volume variance

= (the actual activity level acquired (AQ) - value-added standard quantity of activity that should be used (SQ)) x budgeted activity rate (SP) This measures the non-value-added cost of the activity

unused capacity variance

= activity available (AQ) - activity usage (AU)) x budgeted activity rate (SP) This measures the progress towards reducing the activity waste

value-added costs

= value-added standard quantities (SQ) x price standard (SP)

Reduce cost

Activity management can do this through 1) activity elimination 2) activity selection 3) activity reduction 4) activity sharing

management of activities

This is the key to successful control for firms operating in continuous improvement environments

efficiency, quality, time

What three things do measures of activity performance focus on?

competitive benchmarking

a comparison of activity performance with direct competitors (can be difficult to get public info on this)

responsibility accounting

a fundamental tool of managerial control and is defined by 1) assigning responsibility 2) establishing performance measures or benchmarks 3) evaluating performance 4) assigning rewards; 3 types: 1) financial-based 2) activity-based 3) strategic-based

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. Has two dimensions: cost and process dimensions. 2 broad objectives: 1) improve decision making by providing accurate cost information and 2) reduce costs by encouraging and supporting continuous improvement

Kaizen costing

characterized by constant, incremental improvements to existing processes and products. Accomplished through repetitive use of 2 major subcycles: 1) the kaizen or continuous improvement cycle (plan-do-check-act) and 2) the maintenance cycle (establish-do-check-act)

functional benchmarking

comparison with firms that are in the same industry but do not compete in same markets

quality

concerned with doing the activity right the first time it is performed; measures are financial and non-financial

efficiency

concerned with the relationship of activity outputs to activity inputs; measures are financial and nonfinancial

value-added costs

costs to perform value-added activities with perfect efficiency

activity reduction

decreases the time and resources required by an activity

activity-based responsibility system (process-based responsibility system)

focus on processes and teams. Systemwide optimization is the emphasis. A process perspective is chosen instead of an organizational-unit perspective. 3 methods to improve the way things are done: process improvement, process innovation (business reengineering) and process creation

activity elimination

focuses on eliminating non-value-added activities

financial-based activity accounting

focuses on functional organizational units and individuals. Responsibility is defined in financial terms. Emphasis on achieving optimal financial results at local level. Involves enhancing revenues, reducing costs, and improving asset utilization

Process Value Analysis

fundamental to activity-based responsibility accounting. Focuses on accountability for activities rather than costs, and emphasizes the maximization of systemwide performance instead of individual performance. Concerned with 1) driver analysis 2) activity analysis and 3) Performance

continuous improvement

improving performance that translates into constantly searching for ways to eliminate waste

activity sharing

increases the efficiency of necessary activities by using economies of scale. The quantity of the cost driver is increased without increasing the total cost of the activity itself. This lowers the per-unit cost of the cost driver and amount of cost traceable to the products that consume the activity.

process improvment

incremental and constant increases in efficiency of an existing process

activity selection

involves choosing among various sets of activities that are caused by competing strategies. Different strategies cause different activities. ex: redesign of existing products and processes

external benchmarking

involves comparison with others outside the organization. 3 types: competitive, functional, and generic

Why ABM implementations fail

lack of support from higher-level management, loss of support can occur if it takes too long, resistance to change should be expected, failure to integrate the new system can cause system to breakdown

time

longer usually means more resource consumption and less ability to respond to customer demands. Measures tend to be non-financial

cost dimension

one dimension of activity-based management (ABM); provides cost information about resources, activities, and cost objects of interest such as products, customers, suppliers, and distribution channel. Objective: improving the accuracy of cost assignments. Useful for product costing, strategic cost management and tactical analysis

process dimension

one dimension of activity-based management (ABM); provides information about what activities are performed, why they are performed, and how well they are performed. Objective: cost reduction. Provides ability to engage in and measure continuous improvement

Process creating

refers to installation of an entirely new process with the objective of meeting customer and financial objectives

Kaizen standard

reflects the planned improvement for the upcoming period (assumed to be attainable)

financial measures of performance

should provide specific information about the dollar effects of activity performance changes. Should indicate potential and actual savings. Includes: value- and non-value-added activity costs, trends in activity costs, Kaizen standard setting, benchmarking, activity flexible budgeting, and activity capacity management

generic benchmarking

studies the best practices of non-competitors outside a firm's industry

driver analysis

the effort expended to identify those factors that are the root causes of activity costs

Activity analysis

the heart of process value analysis; the process of identifying, describing, and evaluating the activities an organization performs. Should produce 4 outcomes: 1) what activities are performed 2) how many people perform the activities 3) the time and resources required to perform the activities 4) an assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value

activity capacity

the number of times an activity can be performed

activity output measure

the number of times the activity is performed (quantifiable measure of output). It calculates the demand placed on an activity and is an activity driver. As demands change, cost of activity changes.

process innovation (business reengineering)

the performance of a process in a radically new way with the objective of achieving dramatic improvements in response time, quality, and efficiency

activity flexible budgeting

the prediction of what activity costs will be as activity output changes

process

the source of improvement opportunities

value-added activities

those activities necessary to remain in business. Contribute to customer value and/or help meet an organization's needs. Can be mandated or discretionary.

capacity variances

to determine the potential for improvement and the progress made in the objective of eliminating waste, two capacity variances are defined and calculated: activity volume variance and unused capacity variance

non-value added activities

unnecessary and are not valued by internal or external customers. Fail to produce a change in state or those that replicate work because it wasn't done correctly the first time. Ex: reordering parts, expediting production, rework, warranty work, handling customer complaints, reporting defects, scheduling, moving, waiting, inspecting, and storing

benchmarking

uses best practices found within and outside the organization as the standard for evaluating and improving activity performance. Objective: become the best at performing activities and processes. Can be internal or external

internal benchmarking

within an organization, different units that perform the same activities are compared. The unit with the best performance for a given activity sets the standard