10 -1

CHAPTER

Activity- and
Strategy-Based
Responsibility
Accounting

10 -2

Objectives
Objectives
1. Compare andAfter
contrast
functional-based,
studying
After studying this
this
activity-based,
and strategic-based
chapter,
chapter, you
you should
should
responsibility accounting
systems.
be
be able
able to:
to:
2. Explain process value analysis.
3. Describe activity performance measurement.
4. Discuss the basic features of the Balanced
Scorecard.

Responsibility
Responsibility
Accounting
Accounting Model
Model
The responsibility accounting model is
defined by four essential elements:
Assigning responsibility
Establishing performance measures or
benchmarks
Evaluating performance
Assigning rewards

10 -3

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

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FunctionalFunctionalBased
Based Responsibility
Responsibility
Accounting
Accounting System
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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10 -6

Elements
Elements of
of aa
Functional-Based
Functional-Based
Responsibility
Responsibility
Accounting
Accounting System
System

Individual
in Charge
Operating
Efficiency
Unit
Budgets
Static
Standards
Financial
Efficiency
Actual vs.
Standard
Promotions
Profit
Sharing

Responsibility Is
Defined
Performance Measures
Are Established
Performance Is
Measured
Individuals Are
Rewarded Based on
Financial Performance

10 -7
Organizational
Unit
Financial
Outcomes
Standard
Costing
Currently
Attainable Stds.

Controllable
Costs
Financial
Measures
Bonuses
Salary
Increases

ActivityActivityBased
Based Responsibility
Responsibility
Accounting
Accounting System
System

10 -8

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.

10 -9

Elements
Elements of
of an
an
Activity-Based
Activity-Based
Responsibility
Responsibility
Accounting
Accounting System
System

Team
Value Chain
Optimal
Process
Oriented
Time
Reductions
Cost
Reductions
Promotions
GainSharing

Responsibility Is
Defined
Performance Measures
Are Established
Performance Is
Measured
Individuals Are Rewarded
Based on Multidimensional
Performance

Process

10 -10

Financial
Dynamic
ValueAdded
Quality
Improvement
Trend
Measures
Bonuses
Salary
Increases

StrategyStrategyBased
Based Responsibility
Responsibility
Accounting
Accounting System
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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10 -12

Elements
Elements of
of aa
Strategy-Based
Strategy-Based
Responsibility
Responsibility
Accounting
Accounting System
System

Financial
Process
Communication Strategy
Alignment of
Objectives
Financial
Measures
Process
Measures
Promotions
GainSharing

Responsibility Is
Defined
Performance Measures
Are Established
Performance Is
Measured
Individuals Are Rewarded
Based on Multidimensional
Performance

Customer

10 -13

Infrastructure
Balanced
Measures
Link to
Strategy
Customer
Measures
Infrastructure
Measures
Bonuses
Salary
Increases

Activity-Based
Activity-Based Management
Management
(ABM)
(ABM)

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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.
The activity-based management model has two
dimension: a cost dimension and a process
dimension.

Activity-Based Management Model

Cost Dimension
Resources
Process Dimension
Driver
Analysis

Activities

Performance
Analysis

Why?

What?

How well?

Products
and
Customers

10 -15

10 -16

Process
Process Value
Value Analysis
Analysis
Process value analysis is 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.
Process value analysis is concerned with:
Driver analysis
Activity analysis
Activity performance measurement

10 -17

Activity
Activity Analysis
Analysis
Activity analysis is the process of identifying, describing,
and evaluating the activities an organization performs.
Activity analysis should produce four outcomes:
What activities are done.
How many people perform the activities.
The time and resources are required to perform
the activities.
An assessment of the value of the activities to
the organization.

10 -18

Those
Those activities
activities necessary
necessary to
to
remain
remain in
in business
business are
are called
called
value-added
value-added activities.
activities.

ValueValueAdded
Added
Activities
Activities

10 -19

Activities
Activities needed
needed to
to comply
comply
with
with the
the reporting
reporting
requirements,
requirements, such
such as
as the
theSEC,
SEC,
are
are value-added
value-added by
by aamandate.
mandate.

ValueValueAdded
Added
Activities
Activities

10 -20

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.

ValueValueAdded
Added
Activities
Activities

10 -21

All
All activities
activities other
other than
than those
those
essential
essential to
to remain
remain in
in business
business are
are
referred
referred to
to as
as nonvalue-added
nonvalue-added
activities.
activities.

Nonvalue
Nonvalue
-Added
-Added
Activities
Activities

10 -22

Scheduling

NonvalueNonvalueAdded
Added
Activities
Activities

Moving
Waiting
Inspecting
Storing

Activity Analysis
Activity Analysis Can Reduce Costs in Four Ways:
Activity elimination
Activity selection
Activity reduction
Activity sharing

10 -23

Measures
Measures of
of Activity
Activity
Performance
Performance
Efficiency
Quality
Time

10 -24

Measures of Activity Performance

Financial measures of activity
efficiency include:
Value and nonvalueadded activity cost
reports
Trends in activity cost
reports
Kaizen standard setting
Benchmarking
Life-cycle costing

10 -25

10 -26

Value- and Nonvalue-Added

Cost Reporting
Activity

Activity Driver

SQ

AQ

SP

Welding

Welding hours

10,000

8,000

$40

Rework

Rework hours

10,000

Setups

Setup hours

6,000

60

Inspection

Number of inspections

4,000

15

Value-added
standards call for
their elimination

10 -27

Value- and Nonvalue-Added

Cost Reporting
Activity

Activity Driver

SQ

AQ

SP

Welding

Welding hours

10,000

8,000

$40

Rework

Rework hours

10,000

Setups

Setup hours

6,000

60

Inspection

Number of inspections

4,000

15

Value-added
standards call for
their elimination

Formulas
Value-added costs = SQ x SP
Nonvalue-added costs = (AQ SQ)SP
Where SQ = The value-added output level of an
activity
SQ =
The standard price per unit
of activity output measure
AQ = The actual quantity used of flexible
resources or the practical activity
capacity acquired for committed
resources

10 -28

10 -29

Value- and NonvalueAdded Cost Report

Activity

Value-Added NonvalueCosts
Added Costs

Actual
Costs

Welding

$400,000

$ - 80,000

$320,000

Rework

90,000

90,000

Setups

360,000

360,000

Inspection

60,000

60,000

$400,000

$430,000

$830,000

Total

10 -30

Trend Report: Nonvalue-Added Costs

Activity
Welding

Nonvalue-Added Costs
2003
2004
Change
-$80,000
$ 50,000
$ 30,000

Rework

90,000

70,000

20,000

Setups

360,000

200,000

160,000

60,000

35,000

25,000

$430,000

$355,000

$235,000

Inspection
Total

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 subcycles:
(1) the kaizen or continuous
improvement cycle, and
(2) the maintenance cycle.

10 -31

Kaizen
Kaizen Cost
Cost Reduction
Reduction Process
Process
Check
Do

10 -32

Check
Act
Search

Plan
Kaizen Subcycle

Do
Lock in

Act
Standard
Maintenance
Subcycle

10 -33

Benchmarking
Benchmarking uses
uses best
best
practices
practices as
as the
the standard
standard for
for
evaluating
evaluating activity
activity
performance.
performance.

10 -34

Activity Capacity Management

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

10 -35

Activity
Activity Capacity
Capacity Variance
Variance
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

SP x AQ
SP x AU
$2,000 x 60
$2000 x 40
$120,000
$80,000
Activity
Unused
Volume Variance
Capacity Variance
$120,000 U
$40,000 F

Life-Cycle Cost Commitment Curve

Life Cycle
Cost %
100
90
80

Cost Commitment
Curve

70

90 percent of lifecycle costs are

committed at this
point

60
50
40
30
20
10
Planning

Design

Testing

Production

Logistics

10 -36

10 -37

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:
$250,000 $50,000 = $200,000

Market Share
Objective

Target Price
Target Profit

TargetCosting
Model

Target Cost
Product and
Process Design

NO

Target
Cost Met?
YES
Produce Profit

10 -38

Product
Functionality

Life-Cycle
Life-Cycle Costing:
Costing: Budgeted
Budgeted
Costs
Costs and
and Income
Income
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

10 -39

10 -40

Budgeted Costs
Item
Development costs
Production costs
Logistic costs
Annual subtotal
Postpurchase costs
Annual total
Units produced

2003
$200,000
------$200,000
--$200,000

2004
---$240,000
80,000
$320,000
80,000
$400,000

2005
---$360,000
120,000
$480,000
120,000
$600,000

40,000

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.

10 -41

Budgeted Product Income Statements

Year

Revenues

2003
2004
2005

---$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

Performance Report for

Life-Cycle Costs
Year

Item

10 -42

Actual Costs Budgeted Costs Variance

2003 Development $190,000

$200,000
$10,000 F
2004 Production
300,000
240,000
60,000 U
Logistics
75,000
80,000
5,000 F
2005 Production
435,000
360,000
75,000 U
Logistics
110,000
120,000
10,000 F
Analysis: Production costs were higher than expected because
insertions of diodes and integrated circuits also drive costs (both
production and postpurchase costs).
Conclusion: The design of future products should try to
minimize total insertions.

10 -43

The Balanced Scorecard translates

an organizations mission and
strategy into operational objectives
and performance measures for four
different perspectives:
The financial perspective
The customer perspective
The
Balanced
Scorecard

The internal business

process perspective
The learning and growth
perspective

10 -44

Strategy, according to Robert Kaplan and

David Norton, is defined as
. . . choosing the market and customer
segments the business unit intends to serve,
identifying the critical internal and business
processes that the unit must excel at to
deliver the value propositions to customers
in the targeted market segments, and
selecting the individual and organizational
capabilities required for the internal,
customer, and financial objectives.

Vision and Strategy

Financi
al

Customer

Process

10 -45

Infrastructure

Objectives
Measures
Targets
Initiatives

StrategyTranslation
Process

10 -46

Financial

Increase Sales

Increase Profits

Customer

Increase
Market
Share

Increase
Customer
Satisfaction

Process

Redesign
Products

Reduce
Defective
Units

Infrastructure

Quality
Training

Testable
Testable Strategy
Strategy
Illustrated
Illustrated

10 -47

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

Measures
Percentage of revenue
from new products
Percentage of repeat
customers
Percentage of revenue from
new sources
Product and customer
profitability

10 -48

Objectives

Measures

Cost Reduction:
Reduce unit product cost

Unit product cost

Reduce unit customer cost

Unit customer cost

Reduce distribution channel cost

Cost per distribution channel

Asset Utilization:
Improve asset utilization

Return on investment
Economic value added

10 -49

Summary of Objectives and Measures:

Customer Perspective
Objectives
Core:
Increase market share
Increase customer retention
Increase customer acquisition
Increase customer satisfaction
Increase customer profitability

Measures
Market share (percentage of
market)
Percentage of repeat
customers
Number of new customers
Ratings from customer
surveys
Customer profitability

10 -50

Objectives
Performance Value:
Decrease price
Decrease postpurchase costs
Improve product functionality
Improve product quality
Increase delivery reliability
Improve product image and
reputation

Measures
Price
Postpurchase costs
Ratings from customer
surveys
Percentage of returns
On-time delivery percentage
Aging schedule
Ratings from customer
surveys

10 -51

Actual Conversion Cost per Unit

Standard costs per minute = $1,600,000/400,000

= $4 per minute
Actual cycle time
= 60 minutes/10 units
= 6 minutes per unit
Actual conversion costs = $4 x 6
= $24 per unit
Theoretical Conversion Cost per Unit

Theoretical cycle time

Theoretical conversion
costs

= 60 minutes/12 units
= 5 minutes per unit
= $4 x 5
= $20 per unit

10 -52

Summary of Objectives and Measures:

Process Perspective
Objectives
Innovation:
Increase the number of new
products
Increase proprietary products
Decrease new product
development time

Measures
Number of new products vs.
planned
Percentage of revenue from
proprietary products
Time to market (from start
to finish)

10 -53

Objectives
Operations:
Increase product quality
Increase process efficiency
Decrease process time
Postsales Service:
Increase service quality
Increase service efficiency
Decrease service time

Measures
Quality costs
Output yields
Percentage of defective units
Unit cost trends
Output/input(s)
Cycle time and velocity
MCE
First-pass yields
Cost trends
Output/input(s)
Cycle time

10 -54

Summary of Objectives and Measures:

Learning and Growth Perspective
Objectives
Increase employee capabilities

Measures
Employee satisfaction ratings
Employee turnover percentage
Employee productivity
(revenue/employee)
Hours of training
Strategic job coverage ratio
(percentage of critical job
requirements filled)

10 -55

Objectives
Increase motivation and
alignment
Increase information systems
capabilities

Measures
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

10 -56

Chapter Ten

The
The End
End

10 -57