Activity-Based

Management
Traditional Costing Systems
Traditional
Traditional cost
cost systems
systems were
were created
created when
when
manufacturing
manufacturing processes
processes were
were labor
labor intensive.
intensive.

A
Asingle
single company-wide
company-wide overhead
overhead rate
rate
based
based on on direct
direct labor
labor hours
hours may
may be
be
used
used to to allocate
allocate overhead
overhead to
to products
products
in
in these
these labor
labor intensive
intensive processes.
processes.
 Traditional Costing Systems

Job 1 Job 2
Labor Hours 2 6

In
Inthis
thisexample,
example, overhead
overhead will
will be
beallocated
allocatedto tojobs
jobs
using
using direct
directlabor
laborhours.
hours. IfIf total
total overhead
overheadis is $120,
$120,
how
howmuch
muchwill
will be
beallocated
allocatedto toeach
each job?
job?
Traditional Costing Systems
Job 1 Job 2
Labor Hours 2 6
Overhead
$ 30 $ 90
Allocation

Overhead Rate = $120 ÷ 8 direct labor hours

Overhead Rate = $15 per direct labor hour

Job 1 = 2 hours × $15 per hour = $30

Job 2 = 6 hours × $15 per hour = $90
Traditional Costing Systems

The company introduces

automated machinery. Total
overhead rises from $120 to
$420, while the labor time
needed for Job 2 falls from
6 hours to 1 hour. Now
allocate the $420 overhead
to the two jobs.
Traditional Costing Systems
Job 1 Job 2
Labor Hours 2 1
Overhead
$ 280 $ 140
Allocation

Overhead Rate = $420 ÷ 3 direct labor hours

Overhead Rate = $140 per direct labor hour

Job 1 = 2 hours × $140 per hour = $280

Job 2 = 1 hour × $140 per hour = $140
 Traditional Costing Systems
Job 1 Job 2
Labor Hours 2 1
Overhead
$ 280 $ 140
Allocation

Is this a reasonable costing method?

Automation benefited only Job 2, but most of the
additional overhead cost was allocated to Job 1.
Clearly, we need to look for another cost driver.
 Activity-Based Costing (ABC)
AA costing
costing method
method that
that identifies
identifies the
the activities
activities
performed
performed within
within the
the organization
organization as as itit delivers
delivers
its
its goods
goods and
and services.
services.

Products Activities
Require Consume
Activities Resources

People
Manage
Activities
 Activity-Based Costing (ABC)
AA costing
costing method
method that
that assigns
assigns costs
costs toto
products,
products, based
based on
on the
the number
number ofof activities
activities the
the
organization
organization used
used inin producing
producing them.
them.

Direct Process
Lot size labor setups
hours

Design Machine Customer

time hours contact
 Activity-Based Costing (ABC)
Both
Both manufacturing
manufacturing
and
and nonmanufacturing
nonmanufacturing ABC
ABC isis aa good
good
costs
costs may
may be
be supplement
supplement
assigned
assigned to
to to
to our
our traditional
traditional
products.
products. cost
cost system.
system.
A
B C
Allocation
Allocation bases
bases Used
Used in
in internal
internal
often
often differ
differ from
from decision
decision making
making as as well
well
traditional
traditional costing
costing as
as in
in inventory
inventory valuation
valuation
systems.
systems. for
for external
external reporting.
reporting.
ABC Compared with Traditional Costing
Activity-Based
Activity-Based
Costing
Costing

i ty n
ex ti o
pl nta
o m e it s
C m e f
o f le en
Traditional
Traditional l p B
Costing ve Im f
Costing e of lo
L t e
o s ev
C L
 ABC Compared with Traditional Costing
Traditional Costing Activity-Based Costing
Resource Costs Resource Costs

Directly traced Directly traced

or allocated or allocated

Cost Pools: Cost Pools:

Plants or Activities or
Departments Activity Centers

Predetermined Cost driver

overhead rates for
rate each activity
Cost Objects Cost Objects
 Activity
Activity-Based Costing (ABC) Costs

An Activity Cost $$
Pool is a common $
$ $
way to collect costs $
that are related to
a specific activity in
the ABC system.
 Four Steps in the ABC Process


Identify
Identifyand
andclassify
classifythe
theactivities
activities
related
relatedtotothe
thecompany’s
company’sproducts
productsoror
services.
services.

Estimate
Estimatethethecost
costof
ofeach
eachactivity
activity
identified
identifiedinin.
.

Calculate
Calculateaacost-driver
cost-driverrate
ratefor
foreach
each
activity.
activity.

Assign
Assignactivity
activitycosts
coststo
toproducts
products
using
usingthe
thecost-driver
cost-driverrate.
rate.
 Estimate the Cost of Activities

The
TheABC
ABC teams
teamsshould
shouldgather
gatherdata
dataononthe
thecosts
costsof
ofall
all
the
the activities
activitiesidentified
identified in
in Step
Step 1.
1.

Examine
Examine Ask
Askemployees
employees
accounting
accounting to
toindicate
indicatehow
how
records
recordsfor
for much
muchtimetime
recorded
recorded cost
cost they
theywork
workonon
information.
information. various
various
activities.
activities.
Calculate Cost-Driver Rates for Activities
Two
Two pieces
pieces of
of
information
information are
are Activity
÷
Activity
=
Cost-Driver
required Cost Volume Rate
required to
tocompute
compute
the
thecost-driver
cost-driverrate:
rate:
Activity
Activity Cost
Cost
Activity
ActivityVolume
Volume
May
MayCompany
Companyhas has44employees
employeesin inits
itsQuality
QualityControl
ControlDepartment.
Department.Salaries
Salaries
and
andcosts
costsfor
forthe
thedepartment
departmenttotal
total$360,000
$360,000perperyear.
year. May
Mayproduces
produces500,000
500,000
units
unitsof
ofproduct
productaayear.
year. What
Whatis isthe
thecost-driver
cost-driverrate
rateper
perunit?
unit?
$360,000
$360,000÷÷500,000
500,000units
units==$.72
$.72per
perunit
unit
Calculate Cost-Driver Rates for Activities

MAY
MAYhas
hasaacustomer
customerservice
servicecenter
centerwhere
wherecustomers
customers
can
can call to ask questions. Customers pay afixed
call to ask questions. Customers pay a fixedfee
fee
for
foreach
eachcall
callthey
theymake
maketo tothe
theservice
servicecenter.
center.ItItcosts
costs
MAY
MAY$1,260,000
$1,260,000aayear
yeartotooperate
operatethethecenter.
center. The
Thecenter
center
receives
receives120,000
120,000calls
callsper
peryear.
year. The
Thecenter
centerhandles
handles
1,000,000
1,000,000minutes
minutesof ofcalls.
calls.
What
Whatis isthe
theappropriate
appropriatecost
costdriver:
driver:total
totalminutes
minutesfor
forall
all
calls
callsor
ornumber
numberofofcalls?
calls? What
Whatisisthe
thecost-driver
cost-driverrate?
rate?
Calculate Cost-Driver Rates for Activities

Since
Sincecustomers
customersarearecharged
charged“per
“percall”,
call”,the
theproper
properactivity
activity
in
inthis
thiscase
caseis
isthe
thenumber
numberofofcalls
callshandled
handledbybythe
thecenter.
center.
The
Thecost-driver
cost-driverrate
ratewould
wouldbe:
be:
$1,260,000
$1,260,000÷÷120,000
120,000units
units==$10.50
$10.50per
percall
call
Calculate Cost-Driver Rates for Activities
Cause and effect
relationship between Measurable
activity and costs
Appropriate
cost-driver
base
Based on resource’s Predict or explain
practical capacity to an activity’s use
support activities of resources
Practical Capacity Note
When
When estimating
estimating the the
cost EXAMPLE
EXAMPLE
cost of
of an
an activity,
activity,
only
onlythe
thecosts
costs Suppose
Supposewe werent
rentaa 1,000
1,000
associated
associatedwith withthe
the square
square footfoot warehouse
warehouse for for
product
product should
should bebe $1,000
$1,000per permonth.
month. Only
Only800 800
used
used (practical
(practical sq.
sq. ft.
ft.are
areused
usedtotostore
store
capacity).
capacity). TheThecost
cost Product
ProductA. A. The
Therest
rest of
of the
the
of
of “unused
“unusedcapacity”
capacity” warehouse
warehouseis is“unused”.
“unused”.
should
shouldnot not be
be How
Howmuch
muchrent rent cost
costshould
shouldbe be
applied
appliedto toproducts.
products. allocated
allocatedto to Product
ProductA? A?
Practical Capacity Note

80%, or $800 should be 20%, or $200 should be

assigned to Product A assigned to “unused
capacity”
Assign Activity Costs to Products
1.
1.Identify
Identifyall
all 2.
2. Determine
Determine 3.
3.Assign
Assigncosts
costs
the
theactivities
activities how
how many
many to
toproducts
products
related
relatedtotoaa units
unitsofof each
each using
usingthethecost-
cost-
given
givenproduct
product activity
activity are
are driver
driverrates
ratesfor
for
or
orservice.
service. used
used per
per unit
unit each
each activity.
activity.
of
of product.
product.
Assign Activity Costs to Products
Example: Yazz, Inc. produces 130,000 units of Product A and
400,000 units for Product B. Using the following cost
information, how much overhead should be allocated to
Product A?

Cost-Driver Resources Used

Activity Cost-Driver Base Rate by Product A
Factory Floor Space Square Footage $ 50.000 20,000 Sq. Ft.
Electricity Kilowatts $ 0.050 15,000 KW
Water Gallons $ 0.160 80,000 Gal.
Quality Control Units Inspected $ 0.850 135,000 Units
Packaging - Inner Ounces of product $ 0.025 270,000 Oz.
Packaging - Outer Boxes $ 1.250 135,000 Boxes
Assign Activity Costs to Products
Cost-Driver Cost-Driver Resources Used Cost
Activity Base Rate by Product A Assigned
Factory floor Square $ 50.000 20,000 sq. ft. $ 1,000,000
space footage
Electricity Kilowatts $ 0.050 15,000 kw. $ 750
Water Gallons $ 0.160 80,000 gal. $ 12,800
Units $ 0.850 135,000 units $ 114,750
Quality control
inspected
Ounces of $ 0.025 270,000 oz. $ 6,750
Inner packaging
product
Outer packaging Boxes $ 1.250 135,000 boxes $ 168,750
Total Cost Assigned to Product A $ 1,303,800
Activity-Based Costing Example

Let’s look at an
example from the
Bilson Company.
 Activity-Based Costing Example
•• Bilson,
Bilson,Inc.
Inc.manufactures
manufacturesandandsells
sells5,000
5,000units
unitsof
ofProduct
ProductAA
(deluxe
(deluxemodel),
model),and
and25,000
25,000units
unitsof
ofProduct
ProductBB(standard
(standard
model)
model)each
eachyear.
year.
•• Product
ProductAArequires
requires3.0
3.0direct
directlabor
laborhours
hours(DLH)
(DLH)and
andProduct
ProductBB
requires
requires2.5
2.5DLH
DLHtotoproduce.
produce.
•• Employing
Employingaatraditional
traditionalcosting
costingsystem,
system,Bilson
Bilsonassigns
assigns
overhead
overheadcost
costto
toproducts
productsusing
usingdirect
directlabor
laborhours.
hours.
•• The
Thepredetermined
predeterminedoverhead
overheadrate
rateis:
is:
Mfg. overhead cost $1,550,000
= = $20/DLH
Direct labor hours 77,500
Activity-Based Costing Example
Bilson’s unit product costs using traditional costing are:

Product A Product B
Direct material $ 40.00 $ 29.00
Direct labor 30.00 25.00
Manufacturing overhead
3.0 DLH × $20/DLH 60.00
2.5 DLH × $20/DLH 50.00
Total unit product cost $ 130.00 $ 104.00

Bilson marks its products up by 50 percent and allocates

its $500,000 customer service costs based on revenue.
 Activity-Based Costing Example
$130.00 × 1.50
Traditional Costing
Product A Product B
Volume 5,000 25,000
Sales Price $ 195.00 $ 156.00

Sales Revenue $ 975,000 $ 3,900,000

Direct Material $ 40.00 200,000 $ 29.00 725,000
Direct Labor 30.00 150,000 25.00 625,000
Overhead 60.00 300,000 50.00 1,250,000
Gross Margin $ 65.00 $ 325,000 $ 52.00 $ 1,300,000
Customer Service Costs 100,000 400,000
Product operating income $ 225,000 $ 900,000

$975,000 ÷ ($975,000 +$3,900,000) × $500,000

 Activity-Based Costing Example
Sales
Salesof
of Product
ProductAAhave
have increased
increasedsteadily
steadily since
since introduction,
introduction,
but
butcompany
company income
incomehashasdeclined.
declined.Management
Management at at Bilson
Bilson isis
unhappy
unhappywith
withthe
thetraditional
traditional costing
costingsystem
system and
and they
they have
have
decided
decidedtototry
tryactivity-based
activity-basedcosting.
costing.

In
Inaddition,
addition, management
managementhas has
observed
observedthat that the
the cost
cost ofof direct
direct
labor
labor isisrelatively
relatively stable.
stable.
Since
Sincelabor
labor does
doesnotnot behave
behave
like
like aa unit-level
unit-levelcost,
cost, labor
labor will
will
be
becombined
combinedwith withoverhead
overheadand and
the
thetotal
totalconversion
conversioncost cost
will
willbe
beassigned
assigned using
usingABC.
ABC.
 Activity-Based Costing Example
The
Thetotal
totalconversion
conversion cost
cost is:
is:
Traditional
Traditionaloverhead
overhead $1,550,000
$1,550,000
Labor
Labor (77,500
(77,500hours
hours@ @$10)
$10) 775,000
775,000
Total
Total $2,325,000
$2,325,000

In
Inaddition,
addition, management
management has has
observed
observedthat that the
thecost
costof of direct
direct
labor
labor isis relatively
relatively stable.
stable.
Since
Since labor
labor does
does not
not behave
behave
like
likeaaunit-level
unit-levelcost,
cost, labor
labor will
will
be
becombined
combined with with overhead
overhead and and
the
thetotal
totalconversion
conversioncost cost
will
willbe
beassigned
assignedusingusingABC.
ABC.
 Activity-Based Costing Example
Management has identified the following five activities
and costs in the production of its two products:
Activity Cost
Machine setups $ 800,000
Quality inspections 450,000
Production orders 225,000
Machine-hours worked 650,000
Material receipts 200,000
Total $ 2,325,000

Total conversion cost

 Activity-Based Costing Example
The following transaction data has been
complied by management of Bilson:
Activity Total Product A Product B
Machine setups 5,000 3,000 2,000
Quality inspections 9,000 6,000 3,000
Production orders 600 200 400
Machine-hours worked 50,000 15,000 35,000
Material receipts 800 150 650
 Activity-Based Costing Example
These data can be used to develop predetermined cost-
driver rates for each of the five activities:
Total Rate per
Activity Costs Transactions Transaction
Machine setups $ 800,000 5,000 $ 160.00 per setup
Quality inspections 450,000 9,000 50.00 per inspection
Production orders 225,000 600 375.00 per order
Machine-hours worked 650,000 50,000 13.00 per hour
Material receipts 200,000 800 250.00 per receipt
Total $ 2,325,000

$ 800,000 ÷ 5,000 Machine setups = $160.00 per setup

 Activity-Based Costing Example
The activity-based overhead rates we just calculated
can be used to assign conversion costs to Bilson’s two products.
Product A
Activity ABC Rate Transactions Amount
Machine setups $ 160.00 3,000 $ 480,000
Quality inspections 50.00 6,000 300,000
Production orders 375.00 200 75,000
Machine-hours worked 13.00 15,000 195,000
Material receipts 250.00 150 37,500
Total overhead assigned $ 1,087,500
Number of units produced ÷ 5,000
Conversion per unit $217.50
Activity-Based Costing Example
The activity-based overhead rates we just calculated
can be used to assign conversion costs to Bilson’s two products.

Product B
Activity ABC Rate Transactions Amount
Machine setups $160.00 2,000 $ 320,000
Quality inspections 50.00 3,000 150,000
Production orders 375.00 400 150,000
Machine-hours worked 13.00 35,000 455,000
Material receipts 250.00 650 162,500
Total overhead assigned $ 1,237,500
Number of units produced ÷ 25,000
Conversion per unit $ 49.50
 Activity-Based Costing Example
The activity-based overhead rates we just calculated
can be used to assign conversion costs to Bilson’s two products.
Product B
Activity ABC Rate Transactions Amount
Machine setups $160.00 2,000 $ 320,000
Quality inspections 50.00 3,000 150,000
Production orders 375.00 400 150,000
Machine-hours worked 13.00 35,000 455,000
Material receipts 250.00 650 162,500
Total overhead assigned $ 1,237,500
Total conversion
Number assigned
of units to Product A
produced $ 1,087,500 ÷ 25,000
Total conversionper
Overhead assigned
unit to Product B 1,237,500 $ 49.50
Total overhead $ 2,325,000
Activity-Based Costing Example
Let’s compute the product cost for A and B using our
ABC overhead rates:

Activity Based Costing Product A Product B

Direct materials $ 40.00 $ 29.00
Conversion 217.50 49.50
Total unit product cost $ 257.50 $ 78.50

These amounts did not

change as a result of
using ABC.
 Activity-Based Costing Example
Now compare the unit product costs using the
traditional costing system and our ABC system.

Costing Method Product A Product B

Activity-based costing $ 257.50 $ 78.50
Traditional costing 130.00 104.00

Remember, we used one overhead

rate based on direct labor hours.
 Activity-Based Costing Example
Now compare the unit product costs using the
traditional costing system and our ABC system.

Costing Method Product A Product B

Activity-based costing $ 257.50 $ 78.50
Traditional costing 130.00 104.00

Adopting activity-based costing usually results

in a shift of batch-level and product-level
overhead costs from high-volume standard
products to low-volume, more complex products.
 Activity-Based Costing Example
Now compare the unit product costs using the
traditional costing system and our ABC system.

Costing Method Product A Product B

Activity-based costing $ 257.50 $ 78.50
Traditional costing 130.00 104.00

Can you see how different allocation

methods might lead to making
different management decisions?
 Activity-Based Costing Example
Based on these results Bilson also decides to use ABC to assign
its $500,000 customer service costs. The applicable activity is
number of customer consultations. Customers buying Product A,
the deluxe model, require more consultations than those buying
Product B, the standard model.
Product A Product B Total
Sales Volume 5,000 25,000
Consultations per
Unit Sold 10 3
Total Consultations 50,000 75,000 125,000
Cost per Consultation $ 4.00 $ 4.00
Cost per Product $ 200,000 $ 300,000 500,000

Cost per consultation = $500,000 ÷ 125,000 consultations = $4.00

 Activity-Based Costing Example
No change in sales price
ABC Costing
Product A Product B
Volume 5,000 25,000
Sales Price $ 195.00 $ 156.00

Sales Revenue $ 975,000 $ 3,900,000

Direct Material $ 40.00 200,000 $ 29.00 725,000
Conversion 217.50 1,087,500 49.50 1,237,500
Gross Margin $ (62.50) $ (312,500) $ 77.50 $ 1,937,500
Customer Service Costs 200,000 300,000
Product operating income $ (512,500) $ 1,637,500

Let’s
Let’scompare
compareproduct
product income
income using
usingtraditional
traditionaland
andABC
ABC costing.
costing.
 Product A Product B
Volume 5,000 25,000
Sales Price $ 195.00 $ 156.00

Sales Revenue $ 975,000 $ 3,900,000

ABC
Direct Material $ 40.00 200,000 $ 29.00 725,000 Costing
Conversion 217.50 1,087,500 49.50 1,237,500
Gross Margin $ (62.50) $ (312,500) $ 77.50 $ 1,937,500
Customer Service Costs 200,000 300,000
Product operating income $ (512,500) $ 1,637,500

Product A Product B
Volume 5,000 25,000
Sales Price $ 195.00 $ 156.00

Sales Revenue $ 975,000 $ 3,900,000

Traditional
Direct Material $ 40.00 200,000 $ 29.00 725,000 Costing
Direct Labor 30.00 150,000 25.00 625,000
Overhead 60.00 300,000 50.00 1,250,000
Gross Margin $ 65.00 $ 325,000 $ 52.00 $ 1,300,000
Customer Service Costs 100,000 400,000
Product operating income $ 225,000 $ 900,000
 Product Profitability
Should Bilson
drop Product A?

Should Bilson Should Bilson

increase the price reduce the price
of Product A? of Product B?

Now that we have

measured product
costs accurately,
we see how profitable
each product really is.
 Product Profitability
• The price of Product A, the deluxe model, should
probably be increased. Customers who buy deluxe
models may buy based on features instead of price.
• The price of Product B, the standard model, may be
too high. Customers who buy standard models are
price sensitive. Decreasing
the price would increase volume,
possibly resulting in more income.
 Customer Profitability
Service calls
What are the costs and
benefits of serving
Buy/sell orders
specific customers?

Order changes

Activity-based analysis can

be used to track the costs
of serving customers and
those customers’ contribution
to company profits.
 Estimating Costs of New Products
• Apply ABC analysis of present product lines to
proposed new products.

• This is valid as long as the activities involved with

the new products are similar to those for the
present products.
ABC in Service and Merchandising Companies
The process is exactly the same as for manufacturing!

Identify and classify the activities related to

the company’s products or services.
Estimate the cost of each activity identified
in .
Calculate a cost-driver rate for each activity.
Assign activity costs to products using the
relevant cost-driver rates.
 ABC– Benefits and Limitations

 More
Moreaccurate
accurateand
andinformative
informativeproduct
product
costs
costslead
leadto
tobetter
betterpricing
pricingdecisions.
decisions.
 The
Theactivities
activitiesdriving
drivingcosts
costsare
aremore
more
accurately
accuratelymeasured.
measured.
 Managers
Managersgain
gaineasier
easieraccess
accessto
tothe
the
relevant
relevantcosts.
costs.

An
AnABCABC system
system is
is very
very expensive
expensive
to
to develop
develop and
and implement,
implement, and
and
very
very time-consuming
time-consuming to to maintain.
maintain.
 When Should a Company Use ABC?
•• Indirect
Indirectcosts
costsare
aresignificant
significantin
inproportion
proportionto
todirect
directcosts.
costs.
•• Goods
Goodsare
arecomplex,
complex,requiring
requiringmany
manyinputs
inputsand
andprocesses.
processes.
•• Complex,
Complex,low-volume
low-volumeproducts
productsare
areprofitable
profitablewhile
whilestandard,
standard,
high-volume
high-volumeproducts
productsare
arenot.
not.
•• Different
Differentdepartments
departmentsbelieve
believecosts
costsare
areassigned
assignedinaccurately.
inaccurately.
•• The
Thecompany
companyloses
losesbids
bidsititthought
thoughtwere
werelow,
low,and
andwins
winsbids
bidsitit
thought
thoughtwere
werehigh.
high.
•• Operations
Operationshave
havechanged
changedsignificantly,
significantly,but
butthe
thecosting
costingsystem
system
has
hasnot
notchanged.
changed.
•• Introduction
Introductionof
ofnew
newmodels
modelsresult
resultin
inhigher
highersales,
sales,apparent
apparent
profits
profitsper
perunit,
unit,but
butan
anoverall
overallincome
incomedecline.
decline.
 Additional Uses of ABC
• Activity Based Management (ABM)
• Extends the use of ABC from product costing to a comprehensive
management tool that focuses on reducing costs and improving processes
and decision making.
 The Relationship of Activity-Based Costing and Activity-
Based
• Activity-based management Management
(ABM) is a
• Systemwide, integrated approach
• Focuses management’s attention on activities with the objectives of
improving
• Customer value
• The profit achieved by providing this value
• ABC is the major source of information for activity-based
management.
 The Objective of ABM . . .
• To reduce or eliminate non-value related activities (and therefore
costs).
• Attention to ABM is a part of continuous improvement of operations
and activities.
Process Value Analysis
• Process value analysis
• Fundamental to activity-based responsibility accounting
• Focuses on accountability for activities rather than costs
• Emphasizes the maximization of systemwide performance instead of
individual performance
• Process value analysis is concerned with:
• Driver analysis
• Activity analysis
• Performance measurement
Process Value Analysis
• Driver analysis is the effort expended to identify the factors that are the root
causes of activity costs.
• Activity analysis is the process of identifying, describing, and evaluating the
activities an organization performs.
• Activity analysis should produce four outcomes:
• What activities are performed.
• 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.
Process Value Analysis
• Value-added activities
• Necessary to remain in business

• Nonvalue-added activities
• All activities other than those essential to remain in business
Process Value Analysis
• Nonvalue-added activities
• Scheduling
• Uses resources to determine access to processes
• Moving
• Uses resources to move inventory among departments
• Waiting
• Uses resources while waiting for next process
• Inspecting
• Uses resources to ensure conformance to standards
• Storing
• Uses resources while goods are held in inventory
Process Value Analysis
• Kaizen costing: constant incremental improvement, including cost
reduction through activity management
• Activity elimination
• Focus on eliminating nonvalue-added activities
• Activity selection
• Choose among sets of competing strategies
• Activity reduction
• Decrease time and resources required by an activity
• Activity sharing
• Use economies of scale to increase efficiency
Process Value Analysis
• Assessing activity performance
• Financial measures
• Nonfinancial measures
• Dimensions of performance assessment
• Efficiency
• Quality
• Time
Financial Measures of Activity Efficiency
• Reveal the current level of efficiency and the potential for increased
efficiency
• Value- and nonvalue-added activity costs
• Trends in activity costs
• Kaizen standard setting
• Benchmarking
• Activity flexible budgeting
• Activity capacity management
Financial Measures of Activity Efficiency
Financial Measures of Activity Efficiency
Activity Activity Driver SQ AQ SP
PurchasingPurchasing hours 20,000 23,000 $20
Molding Molding hours 30,000 34,000 12
Inspecting Inspection hours 0 6,000 15
Grinding Number of units 0 5,000 6

Value-added
standards call for
elimination
Financial Measures of Activity Efficiency
Financial Measures of Activity Efficiency
Financial Measures of Activity Efficiency
• 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
• Kaizen (continuous improvement) cycle
• Maintenance cycle
Financial Measures of Activity Efficiency
• Benchmarking
• Uses best practices as the standard for evaluating activity performance
• Internal benchmarking
• Benchmarking against the best internal performance
• External benchmarking
• Comparison with others outside the organization
Financial Measures of Activity Efficiency
• Activity flexible budgeting
• Predicted activity costs reflect activity output changes
• Multiple cost drivers require multiple flexible budget formulas
• Describe both flexible and committed resources
Financial Measures of Activity Efficiency
Financial Measures of Activity Efficiency
Financial Measures of Activity Efficiency
Financial Measures of Activity Efficiency
Financial Measures of Activity Efficiency

Budgeted Cost
Activity Actual Cost 25 Setups Level Variance

Inspection:
Fixed $ 82,000 $ 80,000 $ 2,000 U
Variable 43,500 52,500 9,000 F
Total $ 125,500 $ 132,500 $ 7,000 F
Financial Measures Of Activity Efficiency
• Activity capacity
• The number of times an activity can be performed
• Activity capacity management
• Measured by activity drivers
• Capacity variances
• Activity volume variance
• Unused capacity variance
Financial Measures of Activity Efficiency
TERIMA KASIH