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Hilton ‡ Maher ‡ Selto

Activity-Based Management

McGraw-Hill/Irwin

© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

. . . . Process Improvements. To identify opportunities to improve efficiency. Customer Value. .5-3 Activity-Based Management (ABM) Evaluates the costs and values of process activities . & Reduced Costs ActivityActivity-Based Costing + ValuedValued-Added Analysis = .

Estimate the costs associated with each activity. Calculate a cost-driver rate for each activity. Assign activity costs to products using the costdriver rate.5-4 Activity-Based Management ABM adds: 4 Basic Steps Identify & classify the activities related to the company¶s products or services. Identification of value-added and non-value-added activities Identifies the customer perceived value of each activity Identifies opportunities to enhance value-added activities and reduce or eliminate non-value-added activities .

services. and projects by multiplying the use of cost driver base(s) by the cost driver rates 3. 4.5-5 The Steps Of ABC 5. Measure the costs of individual activities 1. Identify cost-driver bases and measure activity cost-driver rates 2. Identify and measure the different levels of resource spending . jobs. Analyze the profitability of products using ABC unit-level and full costing. Use cost-driver rates to assign activity costs to products.

5-6 The Importance Of Customer Value Activities Create outcomes and consume resources VALUE-ADDED ACTIVITIES enhance the value of products and services in the eyes of the customer while meeting the goals of the organization NON-VALUE-ADDED ACTIVITIES do not contribute to customer perceived value .

.5-7 Non-value Added Activities Why do organizations have incentives to eliminate non-value added activities? Competitors are constantly striving to create more value for customers at lower cost Competition can appear quickly The organization can apply the freed.up resources to valueadded activities or distribute them to the employees of the organization.

5-8 Most Likely Sources of NonValue-Added Activities .

5-9 Identifying Value-Added Activities The test for value added activities ³Would an external customer encourage the organization to do more of the activity?´ ³Would the organization be more likely to reach its goal by performing that activity?´ YES NO If the answer If the answer is ³no´ to is ³yes´ to both or either both it is it is nonvalue-added. YES NO . value-added.

5-10 How Should An Organization Measure Value-Added? 5 VALUEADDED 4 3 Rate on a scale of 1 to 5 2 1 NONVALUEADDED Necessary Activities Neither value-added nor non-value-added Technological Requirements Policy Requirements Regulatory Requirements .

5-11 Who Should Perform The Measurement Activity? Use a team approach   Everyone¶s knowledge is limited Everyone is potentially biased in his or her response .

5-12 Tasks Required by ActivityBased Management Twin objectives of ABM Identify non-value-added activities to be eliminated or reduced Identify value-added activities to be enhanced Redesign processes to eliminate wasteful spending on non-value-added activities .

0% 23. we can improve efficiency.3% 33.3% 100.000 $3. By focusing on those low-value tasks with high resource allocation.0% . 5 (highest) 4 3 2 1 (lowest) Total Oversupplied non-value-added activities $100 0 1.000 3.3% 0.0% 40.200 700 1.5-13 Sorting Activities By Cost And Value By comparing the cost to the value of the task. we can identify oversupplied non-value-added activities and undersupplied valueadded activities.

leaks from the edges of the mold Why#3: High pressure is required to mold the 15. Why#1: Appearance and product function requires removal of the excess 25 high-injection pressure. Before Process Ask ³Why?´ for each Improvements in the process. Why#5: The molds are based on old designs SOLUTION: Rework or replace old molds with improved molds to eliminate 82.1 min.2 min. products properly Why#4: The design of the molds permits leakage 30 min. 25 min. 0 min. plastic Why#2: Undermin. 28 min. . 286 min. 60 min. the need for trimming and recycling. 12.5-14 Identifying Opportunities For Process Improvement Before Process Improvements Elapsed Time: 83 min. step Elapsed Time: Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time Why do employees need to trim excess plastic from molded 0 min. 60 min. products? 30 min.1 min.

286 min. non-value-added record keeping and the 0 min. 82. 60 min. of recording errors? correction 25 min. 60 min.1 min. 28 min. step Elapsed Time: 0 we spending so much time on Why aremin. code for each order and allows the company to mark and min. Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time 30 min. .1 min.5-15 Identifying Opportunities For Process Improvement Before Process Improvements Elapsed Time: 83 min. SOLUTION: Install a bar-coding system to mark and track all 15.2 track all orders electronically 30 min. 25 min. Before Process Ask ³Why?´ for each Improvements in the process. orders electronically A bar-coding system creates a unique bar 12.

60 min. 25 min.2 min. 60 min. If we assume a cost of $10 per hour. Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time After process improvements. 15. 0 min. total elapsed time has been reduced to 82. Before Process Improvements Elapsed Time: 0 min. 30 min.1 min. what is the cost savings? 30 min. 28 min.2 minutes.5-16 Identifying Opportunities For Process Improvement Before Process Improvements Elapsed Time: 83 min. 25 min. 82. 286 min. 12.1 min. .

397 hrs.397 hrs. × $10/hr.2 min. 82. 30 min. 286 min. Time Saved: 286 min. 60 min. $33. 12.82. ÷ 60 min/hr 3.1 min.8 min. 28 min.2 min.97 .1 min. 60 min. Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time 30 min. 25 min. 25 min. 203. Before Process Improvements Elapsed Time: 0 min. Cost Savings: 3. 15.5-17 Identifying Opportunities For Process Improvement Before Process Improvements Elapsed Time: 83 min. . 0 min.

5-18 Implementation Of ActivityBased Costing & Management The Focus of ABC The Focus of ABM Developing improved product or service costs given current processes Identifying opportunities for improving processes Consider cost-benefits .

5-19 Implementation Of ActivityBased Costing And Management What Organizations Adopt ABC and ABM? Companies facing price competition Companies producing many different. complex products from common facilities .

5-20 Can You Be Sure That ABC And ABM Will Be Successful? What is the scope of the ABC or ABM project? Organizationwide System Why use a ³pilot project´? Anticipate the linkages across departments. . groups and processes. Anticipate the data gathering and reporting requirements. Pilot Project What is a ³pilot project´? A project of limited scope that is intended to be a small-scale model of an organizational system.

5-21 Can You Be Sure That ABC And ABM Will Be Successful? What resources are necessary? Management Commitment Technology Personnel and Time Significant projects will require a threeto four-person. cross-functional team at least four to six months of full-time effort Educate top management as to cost/benefits Begin with existing commercial software .

5-22 Can You Be Sure That ABC And ABM Will Be Successful? How can you anticipate and overcome resistance to change? Education and Training Prevent or Minimize Resistance by: Incentives that Encourage and Reward Change Widespread Sponsorship and Participation Effects of Culture Be Sensitive to Differences in National Cultures .

5-23 Can You Be Sure That ABC And ABM Will Be Successful? How do you gather information? ABC and ABM require information that is not normally available from an organization¶s information systems This information can be generated by: Observation Survey Interview .

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