Activity-Based Management

and the New Manufacturing

Environment

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 Activity-Based Management

The use of
activity analysis
to help
management
make decisions

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 Activity-Based Management

How can we increase

our market share for
this product?

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 Activity-Based Management

If we can better manage our costs,

we will become the low-cost producer.
Then we can reduce our prices
and become the low-price seller.

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 Activity-Based Management

I think activity-based
management is the key for us.

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 Activity-Based Management

What’s the difference between

activity-based costing and
activity-based management?

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 Activity-Based Management
Activity-based costing establishes relationships
between overhead costs and activities so that
we can better allocate overhead costs.
Activity-based management focuses
on managing activities to reduce costs.

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 Activity-Based Management
I get it! To reduce costs, we must
understand the relationship
between activities and costs.
Then we must manage those
activities to reduce the costs.

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 Elimination of Non-Value-Added
Costs
Activities

Analysis and
Classification
Non-Value- Value-
Added Added
Activities Activities
Reduce or Continually Evaluate
Eliminate.
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© The McGraw-Hill Companies, Inc., 1999
 Elimination of Non-Value-Added
Costs

Non-Value-Added
Activities

Can be eliminated
Add costs but not without reducing
value to the product. product quality
or performance.

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 Elimination of Non-Value-Added
Costs
Examples of non-value-
added activities are: Get rid
 Storage of materials,

work-in-process, or of them!
finished goods.
 Moving parts, and

materials in the
factory.
 Waiting for work.
 Inspection.

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 Functional-Based
Management Model
Cost View

Resources

Operational View

Efficiency Performance
Functions
Analysis Analysis

Products
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 Activity-Based
Management Model
Cost Dimension

Resources

Process Dimension

Driver Performance
Activities
Analysis Analysis
Why? What? How well?

Products and
Customers
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 Exh.
6-6

Two-Dimensional ABC and

Activity-Based Management
Cost Assignment View

Resource costs
Process View
Activity Analysis Activity Evaluation

Root Activity Performance

Causes Triggers Activities Measures

Cost Objects
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 Exh.
6-6

Two-Dimensional ABC and

Activity-Based Management
Cost Assignment View
Assign resource
costs to activity Resource costs
cost pools.

Root Activity Performance

Causes Triggers Activities Measures

Assign activity
costs to cost
objects using Cost Objects
cost drivers.
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 Using ABM to Eliminate Non-
Value-Added Activities and Costs
Identify Activities.
Identify Non-Value-Added Activities.
Understand Activity Linkages, Root Causes,
and Triggers.
Inspect Rework
Specify Select Receive Produce
finished defective
parts vendor parts goods
goods products

Establish Performance Measures.

Report Non-Value-Added Costs.

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 Achieving Cost Reduction
Activity Activity
Reduction Selection

Reduce
Non-Value-Added
Costs
Activity Activity
Sharing Elimination

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 Process Value 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

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 Activity 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.
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 Value- and Nonvalue-Added
Cost Reporting
Activity Activity Driver SQAQ SP
Welding Welding hours 10,0008,000 $40
Rework Rework hours 010,000 9
Setups Setup hours 06,000 60
Inspection Number of inspections 04,000 15

Value-added
standards call for
their elimination
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 Value- and Nonvalue-Added
Cost Reporting
Activity Activity Driver SQ AQ SP
Welding Welding hours 10,000 8,000 $40
Rework Rework hours 0 10,000 9
Setups Setup hours 0 6,000 60
Inspection Number of inspections 0 4,000 15

Value-added
standards call for
Irwin/McGraw-Hill their elimination © The McGraw-Hill Companies, Inc., 1999
 Formulas
Value-added costs = SQ x SP
Nonvalue-added costs = (AQ – SQ)SP
Where SQ = The value-added output level of an
activity
SP = 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

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 Value- and Nonvalue-
Added Cost Report
Value-Added Nonvalue- Actual
Activity Costs Added Costs Costs
Welding $400,000 $ 80,000 $480,000
Rework 0 90,000 90,000
Setups 0 360,000 360,000
Inspection 0 60,000 60,000
Total $400,000 $590,000 $990,000

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 Trend Report: Nonvalue-Added Costs
Nonvalue-Added Costs
Activity 2003 2004 Change

Welding $80,000 $ 50,000 $ 30,000

Rework 90,000 70,000 20,000
Setups 360,000 200,000 160,000
Inspection 60,000 35,000 25,000
Total $590,000 $355,000 $235,000

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 Now this is an
activity that I
can manage!

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999