Activity Based Management

PPT 14 -1
Activity-Based Management (ABM)

Activity-based management (ABM) is a

systemwide, integrated approach that focuses
management’s 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.
PPT 14 -2
Activity-Based Management Model
Cost Dimension

Resources
Process Dimension

Driver Analysis Activities Performance Measures

Why? What? How Well?

Products and
Customers
PPT 14 -3
 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
Performance measurement

PPT 14 -4
 Activity Analysis

Activity analysis should produce four outcomes:

What activities are performed?
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.

PPT 14 -5
 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.

PPT 14 -6
 Nonvalue-Added Activities

Nonvalue-Added Activities are activities that add cost and impede

performance.

Scheduling
Moving
Waiting
Examples Storing

PPT 14 -7
 Activity Analysis

Activity Analysis Can Reduce Costs in Four Ways:

Activity elimination: The identification and elimination

of activities that fail to add value. 
Activity selection: The process of choosing among
different sets of activities caused by competing
strategies.
Activity reduction: The process of decreasing the time
and resources required by an activity. PPT 14 -8
Activity Performance Measurement

Three Dimensions of Activity Performance

 Efficiency

 Quality

 Time

PPT 14 -9
 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

PPT 14 -10
• The Kaizen standard is a Japanese method of doing business based on
the management theory of gradual and continuous change. Kaizen
focuses on aspects of a company's processes that can be refined, improved
and made constant, with a resulting increase in efficiency and
productivity.
• Benchmarking is the process of measuring key business metrics and
practices and comparing them—within business areas or against a
competitor, industry peers, or other companies around the world—to
understand how and where the organization needs to change in order to
improve performance.

PPT 14 -11
 Value- and Nonvalue-Added
Cost Reporting

Consider the following data:

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 # of inspections 0 4,000 15

PPT 14 -12
 Value- and Nonvalue-Added
Cost Report (continued)

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

PPT 14 -13
Trend Report: Nonvalue-Added Costs

Nonvalue-Added Costs
Activity 2000 2001 Change
Welding $ 80,000 $ 50,000 $ 30,000
Rework 360,000 200,000 160,000
Setups 90,000 70,000 20,000
Inspections 60,000 35,000 25,000
Total $590,000 $355,000 $235,000

PPT 14 -14
 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.

PPT 14 -15
Improving Performance Through
Benchmarking

Organization A Share
Organization B
Cost of Processing a Information
Cost of Processing a
Purchase Order is Purchase Order is
$20 $15

How do we improve?

PPT 14 -16
 Activity-Based Budgeting

Activity flexible
budgeting is the
prediction of what
activity costs will be as
activity output changes.

PPT 14 -17
Flexible Budget: Direct Labor Hours

Cost Formula Direct Labor Hours

Fixed Variable10,00020,000
Direct materials ---$10 $100,000$200,000
Direct labor ---8 80,000160,000
Maintenance $ 20,0003 50,00080,000
Machining 15,0001 25,00035,000
Inspections 120,000--- 120,000120,000
Setups 50,000--- 50,00050,000
Purchasing 220,000 --- 220,000 220,000
Total $425,000$22 $645,000$865,000 ======= ===
======= =======

PPT 14 -18
 Activity Flexible Budget
Driver: Direct Labor Hours
Formula Level of Activity
Fixed Variable10,00020,000
Direct materials ---$10 $100,000$200,000
Direct labor --- 8 80,000 160,000
Subtotal $0$18 $180,000$360,000
== ===

Driver: Machine Hours

Fixed Variable8,000 16,000
Maintenance $20,000$5.50$64,000 $108,000
Machining 15,000 2.00 31,000 47,000
Subtotal $35,000$7.50$95,000 $155,000
====== ====

PPT 14 -19
Activity Flexible Budget (continued)
Driver: Number of Setups
Fixed Variable25 30
Inspections $80,000$2,100$132,500 $143,000
Setups --- 1,800 45,000 54,000
Subtotal $80,000$3,900$177,500 $197,000====== =====

Driver: Number of Orders

Fixed Variable15,00025,000
Purchasing $211,000$1 $226,000$236,000 ======= ==
Total $678,000$948,000
======= =======

PPT 14 -20
Activity-Based Performance Report

Actual Costs Budgeted Costs Budget Variance

Direct materials $101,000 $100,000 $1,000
Direct labor 80,000 80,000 ---
Maintenance 55,000 64,000 9,000
Machining 29,000 31,000 2,000
Inspections 125,500 132,500 7,000
Setups 46,500 45,000 1,500
Purchasing 220,000 226,000 6,000
Total $657,000 $678,500 $21,500
======= ======= ======

PPT 14 -21
Variances for the Inspection Activity

Activity Actual Cost Budgeted Cost Variance

Inspection:
Fixed $ 82,000 $ 80,000 $2,000
Variable 43,500 52,500 9,000
Total $125,500 $132,500 $7,000
======= =======
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PPT 14 -22
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