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Activity Based Management and Activity Based Costing

This document provides an overview of activity-based management (ABM) and activity-based costing (ABC). It defines ABM as focusing on controlling production activities to improve customer value and profitability. ABC is a cost accounting system that assigns costs to products based on activities and cost drivers. It collects costs based on the nature and extent of activities. The document discusses categorizing activities as value-added, non-value-added, or business value-added. It also covers process mapping, cost drivers, and factors in implementing ABC such as product/process complexity and diversity.

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Celestaire Lee
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58 views

Activity Based Management and Activity Based Costing

This document provides an overview of activity-based management (ABM) and activity-based costing (ABC). It defines ABM as focusing on controlling production activities to improve customer value and profitability. ABC is a cost accounting system that assigns costs to products based on activities and cost drivers. It collects costs based on the nature and extent of activities. The document discusses categorizing activities as value-added, non-value-added, or business value-added. It also covers process mapping, cost drivers, and factors in implementing ABC such as product/process complexity and diversity.

Uploaded by

Celestaire Lee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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ACTIVITY BASED

MANAGEMENT AND JBCG

ACTIVITY BASED COSTING


INTRODUCTION
To succeed in today’s global marketplace, companies must
generate high-quality products or services and have
competitive cost structures.
ACTIVITY BASED MANAGEMENT
(ABM)
In theory, production or performance cost would not matter if
a sufficient number of customers were willing to buy a
product or service at a price that was high enough to cover
that cost and provide a reasonable profit margin.
ABM is a business process model focusing on the control of
production or performance activities so that they improve
customer value and enhance profitability.
ACTIVITY ANALYSIS
An activity is any repetitive action that is performed in
fulfillment of a business function.
Activity analysis is the process of studying activities to (1)
classify them into one of the categories and devise ways to
minimize or eliminate activities that increase costs but
provide little or no customer value.
CATEGORIES OF ACTIVITIES
Value-added activity – increases the worth of a product or
service to a customer and is one for which the customer is
willing to pay.
Non-value-added activity – increases the time spent on a
product or service but does not increase its worth and, thus, is
viewed as unnecessary from the customer’s perspective.
Business-value-added activity – activities that are essential to
business operations but for which customers would not
willingly choose to pay.
PROCESS MAP
Should be prepared to indicate very step in every area that
goes into making or doing something.
Some steps of the process map are necessary and, therefore,
must be performed for the process to be completed.
CLASSIFICATION OF ACTIVITIES
ON A PROCESS MAP
Processing (service) time
Inspection time
Transfer time
Idle time
*Packaging
Total Cycle (or Lead) Time = VA Time + NVA Time
VALUE CHART
Operations on Assembly Days
Receiving 1
Quality Control 0.5
Storage 30
Move to production 0.25
Waiting for use 5
SetUp of Machinery 0.25
Assembly 2
Move to Inspection 0.25
Move to Finishing 0.25
VALUE CHART
Operations on Finishing Days
Receiving 0.25
Move to Production 0.25
Waiting for Use 10
SetUp 0.25
Finishing 1
Inspection 1
Packaging 1
Move to Loading Dock 0.25
Storage 7
Ship 8
FORMULAS
Manufacturing cycle efficiency (MCE) = Total VA
Time/Total Cycle Time
Service cycle efficiency (SCE) = Total actual service
time/Total cycle time
*In a service company, cycle time refers to the time between
service order and service completion.
FACTOR OF NVA TIME
Systematic – the need to manufacture products in large
batches.
Physical – The need to move goods because of inefficient
plant or machine layout.
Human – The need to rework products because of errors
made by employees who have improper skills.
ACTIVITY-BASED COSTING
(ABC)
ABC is a cost accounting system that focuses on an
organization’s activities, collects costs on the basis of the
underlying nature and the extent of those activities, and uses
the gathered information to determine product/service cost
accumulation and assess the appropriateness of activity
accumulation.
Cost drivers are that have direct cause-and-effect
relationships to a cost.
EXAMPLES OF COST DRIVERS
Factory Insurance Shipping Cost
Total value of plant assets Distance of Trip
Number of accidents or claims Breakdowns
occurring in a period Weather
Quantity of workers Driver
Inventory size Vehicle Maintenance
Traffic
CATEGORIES OF ACTIVITY
Unit Level costs – caused by the production or acquisition of
a single unit of product.
Batch Level costs – caused by a group of things being made,
handled, or processed at a single time.
Product Level costs – caused by the development,
production, or acquisition of different items.
Organizational Level costs – incurred for the sole purpose of
supporting facility operations.
SIGNIFICANT COST DRIVERS
Product Variety – number of different types of products
made.
Product Complexity – number of components included in a
product.
Process Complexity – number of processes through which a
product flows.
FACTORS IN USING ABC
Number and diversity of products or services produced.
Diversity and differential degree of support services used for
different products.
Extent to which common processes are used.
Effectiveness of current cost allocation methods.
Rate of growth of period costs.
NEED FOR ABC
High Product/Process Complexity
Lack of Commonality in Overhead Costs
Irrationality of Current Cost Allocations
Changes in Business Environment
CRITICISMS OF ABC
Barriers
Individual Barriers Organizational Barriers Environmental Barriers
Fear of Change Territorial issues Employee groups
Shift in Status Hierarchical issues Regulatory agencies
Necessity to Learn new Corporate culture issues Financial accounting
skills mandates

Non GAAP
CREATING A BETTER
LEARNING EXPERIENCE
JBCG

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