MANAGEMENT ACCOUNTING

AGUS SISWANDI 01153056

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Chapter Ten

Activity- and Strategic-Based Responsibility Accounting

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Learning Objectives
Compare and contrast functional-based,

activity-based, and strategic-based responsibility accounting systems.

Explain process value analysis.

Describe activity performance

measurement.
Explain the basic features of the Balanced

Scorecard.
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Responsibility Accounting Model

The responsibility accounting model is defined by four essential elements:
assigning responsibility establishing performance measures or benchmarks

evaluating performance
assigning rewards

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Types of Responsibility Accounting

Management accounting offers the following three types of responsibility accounting systems.
Functional-based Activity-based Strategic-based

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Functional-Based Responsibility Accounting System

A functional-based responsibility accounting system assigns responsibility to organizational units and expresses performance measures in financial terms.
It is the responsibility accounting system that was developed when most firms were operating in relatively stable environments.

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Activity-Based Responsibility Accounting System

An activity-based responsibility accounting system assigns responsibility to processes and uses both financial and nonfinancial measures of performance.
It is the responsibility accounting system developed for those firms operating in continuous improvement environments.

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Elements of a Functional-Based Responsibility Accounting System

Individual in Charge Responsibility is Defined
Operating Efficiency Unit Budgets Static Standards Financial Outcomes Standard Costing Currently Attainable
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Organizational Unit

Performance Measures are Established

Elements of a Functional-Based Responsibility Accounting System

Financial Efficiency Performance is Measured
Actual versus Standard Promotions Individuals are Rewarded Based on Financial Performance Financial Measures Bonuses Controllable Costs

Profit Sharing

Salary Increases
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Elements of an Activity-Based Responsibility Accounting System

Team Responsibility is Defined
Value Chain Optimal Performance Measures are Established Process Oriented ValueAdded
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Process

Financial

Dynamic

Elements of an Activity-Based Responsibility Accounting System

Time Reductions Performance is Measured
Cost Reductions Promotions Individuals are Rewarded Based on Multidimensional Performance Trend Measures Bonuses Quality Improvement

Gainsharing

Salary Increases
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Strategic-Based Responsibility Accounting System

A strategic-based responsibility accounting system (Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives:
The financial perspective
The customer perspective The process perspective The infrastructure (learning and growth) perspective
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Elements of a Strategic-Based Responsibility Accounting System

Financial Responsibility is Defined
Process Infrastructure Customer

Communicate Strategy Alignment of Objectives

Performance Measures are Established

Balanced Measures Link to Strategy

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Elements of a Strategic-Based Responsibility Accounting System

Financial Measures Performance is Measured
Process Measures Promotions Individuals are Rewarded Based on Multidimensional Performance Infrastructure Measures Bonuses Customer Measures

Gainsharing

Salary Increases
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Activity-Based Management (ABM)

Activity-based management (ABM) is a systemwide, integrated approach that focuses managements attention on activities with the objective of improving customer value and the profit achieved by providing this value.
Activity-based management encompasses both product costing and process value analysis.

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Activity-Based Management Model

Cost Dimension

Resources

Process Dimension

Driver Analysis Why?

Activities What? Products and Customers

Performance Analysis How Well?

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Process Value Analysis

Process value analysis is fundamental to activitybased responsibility accounting, focuses on accountability for activities rather than costs, and emphasizes the maximization of systemwide performance instead of individual performance.
Process value analysis is concerned with:
Driver analysis Activity analysis

Performance measurement
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Activity Analysis

Activity analysis should produce four outcomes: What activities are done? How many people perform the activities?

The time and resources required to perform the activities.

An assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value.

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Value-Added Activities
A discretionary activity is classified as value-added provided it simultaneously satisfies three conditions:
The activity produces a change of state. The change of state was not achievable by preceding activities. The activity enables other activities to be performed.

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Nonvalue-Added Activities
Non-Value-Added Activities are activities that add cost and impede performance. Scheduling Moving

Waiting

Examples

Inspecting Storing

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Activity Analysis
Activity Analysis Can Reduce Costs in Four Ways:

Activity elimination Activity selection Activity reduction Activity sharing

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Activity Performance Measurement

Three Dimensions of Activity Performance

Efficiency

Quality
Time

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Measures of Activity Performance

Financial measures of activity efficiency include:
Value and nonvalue-added activity cost reports Trends in activity cost reports Kaizen standard setting Benchmarking

Life-cycle costing
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Value- and Nonvalue-Added Reporting

Consider the following data: Activity Welding Activity Driver Welding hours SQ 10,000 AQ 8,000 SP $40

Rework
Setups Inspection

Rework hours
Setup hours # of inspections

0
0 0

10,000
6,000 4,000

9
60 15

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Value- and Nonvalue-Added Cost Report

ValueAdded Costs $400,000 ---------========

Activity Welding Rework Setups Inspection

NonvalueAdded Costs $ 80,000 90,000 360,000 60,000

========

Actual Costs $480,000 90,000 360,000 60,000

========
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Total

$400,000

$590,000

$990,000

Trend Report: Nonvalue-Added Costs

Activity Welding Rework Setups Inspection

Nonvalue-Added Costs 2000 2001 Change $ 80,000 90,000 360,000 60,000

========

$ 50,000 70,000 200,000 35,000

========

$ 30,000 20,000 160,000 25,000

========
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Total

$590,000

$355,000

$235,000

The Role of Kaizen Standards

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 sub-cycles:
(1) the kaizen or continuous improvement cycle, and (2) the maintenance cycle.

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Improving Performance Through Benchmarking

Organization A
Cost of Processing a Purchase Order is $20

Share Information

Organization B
Cost of Processing a Purchase Order is $15

How do we improve?

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Activity Capacity Management

Activity capacity is the number of times an activity can be performed.

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Activity Capacity Variances

AQ = Activity capacity acquired (practical capacity) SQ = Activity capacity that should be used

AU = Actual usage of the activity

SP = Fixed activity rate

SP x SQ $2,000 x 0 $0

Activity Volume Variance $120,000 U

SP x AQ $2,000 x 60 $120,000

Unused Capacity Variance $40,000 F

SP x AU $2000 x 40 $80,000

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Life-Cycle Cost Commitment Curve

Cost Commitment Curve
Life Cycle Cost % 100 90 80 70 60 50

40
30 20 10 Planning Design

90 percent of life-cycle costs are committed at this point

Testing

Production

Logistics

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Target Costing
A target cost is the difference between the sales price needed to capture a predetermined market share and the desired per-unit profit.
Example: Current product specifications and the targeted market share call for a sales price of $250,000. The required profit is $50,000 per unit. The target cost is computed as follows:
Target cost = $250,000 - $50,000 = $200,000

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A Life-Cycle Costing Example

Unit Cost and Price Information for New Product

Unit production cost Unit life-cycle cost Unit whole-life cost Budgeted unit selling price

$6 10 12 15

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Life-Cycle Costing Example (continued)

Budgeted Costs Item Development costs Product costs Logistic costs Annual subtotal Post purchase costs Annual total Units produced 2000 $200,000 ------$200,000 ---$200,000 ====== 2001 ---$240,000 80,000 $320,000 80,000 $400,000 ====== 40,000 2002 ---$360,000 120,000 $480,000 120,000 $600,000 ====== 60,000 Item Total $ 200,000 600,000 200,000 $1,000,000 200,000 $1,200,000 ========

Note: the post purchase costs are costs incurred by the customer and are not included in the budgeted income e statement.
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Life-Cycle Costing Example (continued)

Budgeted Product Income Statements
Year 2000 2001 2002 Revenues ---$600,000 900,000 Costs $(200,000) (320,000) (480,000) Annual Income $(200,000) 280,000 420,000 Cumulative Income $(200,000) 80,000 500,000

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Performance Report for Life-Cycle Costs

Year 2000 2001 2002 Item Development Production Logistics Production Logistics Actual Costs $190,000 300,000 75,000 435,000 110,000 Budgeted Costs $200,000 240,000 80,000 360,000 120,000 Variance $10,000 60,000 5,000 75,000 10,000

F U F U F

Analysis: Production costs were higher than expected because insertions of diodes and integrated circuits also drive costs (both production and post purchase costs).

Conclusion: The design of future products should try to minimize total insertions.

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Financial Perspective
The financial perspective has three strategic themes:
Revenue Growth Cost Reduction

Asset Utilization

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Summary of Objectives and Measures: Financial Perspective

Objectives
Revenue Growth:
Increase the number of new products Create new applications Develop new customers and markets Adopt a new pricing strategy Percentage of revenue from new products Percentage of revenue from new applications Percentage of revenue from new sources Product and customer profitability

Measures

Cost Reduction: Reduce unit product cost Reduce unit customer cost Reduce distribution channel cost Asset Utilization: Improve asset utilization

Unit product cost Unit customer cost Cost per distribution channel

Return on investment Economic value added PPT 10 -38

Summary of Objectives and Measures: Customer Perspective

Objectives
Core:
Increase market share Increase customer retention Market share (percentage of market) Percentage growth of business from existing customers Percentage of repeating customers Number of new customers Ratings from customer surveys Customer profitability

Measures

Increase customer acquisition Increase customer satisfaction Increase customer profitability

Performance Value:
Decrease price Decrease postpurchase costs Improve product functionality Improve product quality Increase delivery reliability Improve product image and reputation Price Postpurchase costs Ratings from customer surveys Percentage of returns On-time delivery percentage Aging schedule Ratings from customer surveys PPT 10 -39

Summary of Objectives and Measures: Process Perspective

Objectives
Innovation:
Increase the number of new products Increase proprietary products Decrease new product development time Number of new products vs. planned Percentage revenue from proprietary products Time to market (from start to finish)

Measures

Operations:
Increase process quality Quality costs Output yields Percentage of defective units Unit cost trends Output/input(s) Cycle time and velocity MCE

Increase process efficiency Decrease process time

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Summary of Objectives and Measures: Process Perspective (continued)

Objectives
Postsales Service:
Increase service quality Increase service efficiency Decrease service time First-pass yields Cost trends Output/input Cycle time

Measures

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Process Perspective (continued)

Definitions
Cycle Time: Velocity: Manufacturing Cycle Efficiency (MCE) = The time required to produce one unit of product The number of units that can be produced in a given period of time (e.g., units per hour)

Processing time Processing time + Move Time + Inspection Time + Wait time

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Process Perspective (continued)

Example 1
A plant has the theoretical capability of producing 10,000 bikes per quarter. There are 20,000 production hours available each quarter. Compute the theoretical cycle time and velocity. Cycle time = 20,000 hrs/10,000 bikes = 2 hrs per bike Velocity = 10,000 bikes/20,000 hours = 0.5 bikes per hour

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Process Perspective (continued)

Example 2 A product has the following activities and times:
Processing (three departments): Moving (four moves): Waiting (for the second and third processes): Storage (before delivery): 10 hours 3 hours 8 hours 19 hours

Compute MCE.
MCE = 10/(10+3+8+10) = 10/40 = 0.25 or 25%
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Summary of Objectives and Measures: Learning and Growth Perspective

Objectives
Increase employee capabilities

Measures
Employee satisfaction ratings Employee turnover percentages Employee productivity (revenue/employee) Hours of training Strategic job coverage ratio (percentage of critical job requirements filled) Suggestions per employee Suggestions implemented per employee Percentage of processes with real-time feedback capabilities Percentage of customer-facing employees with on-line access to customer and product information

Increase motivation and alignment Increase information systems capabilities

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End of Chapter 10

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