MAHM6e Ch10.Ab.az

8/12/2019 MAHM6e Ch10.Ab.az

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Activity- and

Strategy-BasedResponsibility

Accounting

CHAPTER


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1. Compare and contrast functional-based,

activity-based, and strategic-based

responsibility accounting systems.

2. Explain process value analysis.

3. Describe activity performance measurement.

4. Discuss the basic features of theBalanced

Scorecard.

Objectives

After studying this

chapter, you should

be able to:


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Responsibility

Accounting Model

Assigning responsibility

Establishing performancemeasures or benchmarks

Evaluating performance

Assigning rewards

The responsibility accounting modelis

defined by four essential elements:


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Functional-based

Activity-based

Strategic-based

Types of Responsibility

Accounting

Management accounting offers thefollowing three types of responsibilityaccounting systems.


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A functional-based responsibil i ty accounting systemassigns responsibility to organizational units and

expresses performance measures in financial terms.

Functional-

Based ResponsibilityAccounting System

It is the responsibility accounting system that

was developed when most firms were

operating in relatively stable environments.


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Elements of a

Functional-Based

ResponsibilityAccounting System


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Responsibility Is

Defined

Individual

in Charge

Operating

Efficiency

Financial

OutcomesUnit

Budgets

Static

Standards

Standard

Costing

Currently

Attainable Stds.Financial

Efficiency

Actual vs.

Standard

Controllable

CostsFinancial

Measures

Performance Measures

Are Established

Performance Is

Measured

Individuals Are

Rewarded Based on

Financial Performance

Profit

Sharing

Promotions Bonuses

Salary

Increases

Organizational

Unit


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Elements of an

Activity-Based



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Responsibility Is

Defined

Team

Value Chain

Optimal

Process

Oriented

Dynamic

Value-

AddedTime

Reductions

Cost

Reductions

Quality

ImprovementTrend

Measures


Are Established

Performance Is

Measured

Individuals Are Rewarded

Based on Multidimensional

Performance

Gain-

Sharing

Promotions Bonuses

Salary

Increases

Financial

Process


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Strategy-

Based Responsibility

Accounting System

A strategic-based responsibil i ty accounting system

(Balanced Scorecard)translates the mission andstrategy of an organization into operational objectivesand measures for four different perspectives:

The financial perspective

The customer perspective

The process perspective

The infrastructure (learning and

growth) perspective


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Elements of a

Strategy-Based



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Responsibility Is

Defined

Financial

Process

Communica-

tion Strategy

Alignment of

Objectives

Balanced

Measures

Link to

StrategyFinancial

Measures

Process

Measures

Customer

MeasuresInfrastructure

Measures


Are Established

Performance Is

Measured

Individuals Are Rewarded

Based on Multidimensional

PerformanceGain-

Sharing

Promotions Bonuses

Salary

Increases

Infrastructure

Customer


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Activity-based management (ABM)is a systemwide,

integrated approach that focuses managements attention

on activities with the objective of improving customervalue and the profit achieved by providing this value.

Activity-Based Management

(ABM)

Activity-based management encompasses both

product costing and process value analysis.

The activity-based management model has two

dimension: a cost dimensionand a process

dimension.


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Cost Dimension

Activity-Based Management Model

Resources

Process Dimension

Driver

Analysis

Why?

Performance

Analysis

How well?

Products

and

Customers

Activities

What?


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Process value analysisis fundamental to activity-based

responsibility accounting, focuses on accountability for

activities rather than costs, and emphasizes the

maximization of systemwide performance instead ofindividual performance.

Process Value Analysis

Process value analysis is concerned with:

Driver analysis

Activity analysis

Activity performance measurement


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Activity Analysis

Activity analysisis the process of identifying, describing,

and evaluating the activities an organization performs.

Activi ty analysisshould produce four outcomes:

What activities are done.

How many people perform the activities.

The time and resources are required to performthe activities.

An assessment of the value of the activities to

the organization.


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Those activities necessary to

remain in business are calledvalue-added activities.

Value-

Added

Activities


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Activities needed to comply

with the reporting

requirements, such as the

SEC, are value-added by a

mandate.

Value-

AddedActivities


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A discretionary activi tyis classified as value-added

provided it simultaneously satisfies three conditions:

Value-Added

Activities

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.


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Nonvalue-

AddedActivities

Scheduling

Moving

Waiting Inspecting

Storing


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Activi ty Analysis

Activity elimination

Activity selection

Activi ty reduction

Activi ty sharing

Activity Analysis Can Reduce Costs in Four Ways:


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Efficiency

Quality

Time

Measures of Activity

Performance


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Measures of Activi ty Performance

Financial measures of activityefficiency include:

Value and nonvalue-

added activity cost

reports

Trends in activity cost

reports

Kaizen standard setting

Benchmarking

Life-cycle costing


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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

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

their elimination


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Welding $400,000 $ - 80,000 $320,000

Rework 0 90,000 90,000

Setups 0 360,000 360,000

Inspection 0 60,000 60,000

Total $400,000 $430,000 $830,000

Value- and Nonvalue-

Added Cost ReportValue-Added Nonvalue- Actual

Activity Costs Added Costs Costs


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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 25,000Total $430,000 $355,000 $235,000

Nonvalue-Added Costs

Activity 2003 2004 Change

Trend Report: Nonvalue-Added Costs


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The Role of Kaizen Standards

Kaizen costingis concerned withreducing the costs of existing

products and processes.

Controll ing this cost reduction process is

accomplished through the repeti tive useof two major subcycles:

(1) the kaizen or continuous

improvement cycle, and

(2) the maintenance cycle.


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Act

Kaizen Cost Reduction Process

Do Do

Kaizen Subcycle Maintenance

Subcycle

Check

Plan

Search

Check

Act

StandardLock in


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Benchmarking uses best

practices as the standard forevaluating activity

performance.


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Activity Capacity Management

Activi ty capacityis

the number of times

an activity can be

performed.


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AQ = Activity capacity acquired (practical capacity)

SQ = Activity capacity that should be used

AU = Actual usage of the activity

SP = Fixed activity rate

SP x SQ

$2,000 x 0

$0Activity

Volume Variance

$120,000 U

Unused

Capacity Variance

$40,000 F

Activity Capacity Variance

SP x AQ

$2,000 x 60$120,000

SP x AU

$2000 x 40$80,000


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Target Costing

A target costis the difference between the sales price

needed to capture a predetermined market share and the

desired per-unit profit.

Example: Current product specifications and thetargeted market share call for a sales priceof $250,000. The required profit is $50,000

per unit. The target cost is computed asfollows:

$250,000$50,000 = $200,000


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Target Cost

Target PriceMarket Share

Objective

Product

Functionality

Target Profit

Product and

Process Design

Target

Cost Met?

NO

Produce Profit

YES

Target-

Costing

Model


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Unit Cost and Price Information for New Product

Unit production cost $ 6

Unit life-cycle cost 10

Unit whole-life cost 12

Budgeted unit selling price 15

Life-Cycle Costing: Budgeted

Costs and Income


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2003 ---- -$200,000 -$200,000 -$200,000

2004 $600,000 -320,000 280,000 80,000

2005 900,000 -480,000 420,000 500,000

Annual Cumulative

Year Revenues Costs Income Income

Budgeted Product Income Statements

10 42P f R t f


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10-42Performance Report for

L ife-Cycle Costs

2003 Development $190,000 $200,000 $10,000 F

2004 Production 300,000 240,000 60,000 U

Logistics 75,000 80,000 5,000 F

2005 Production 435,000 360,000 75,000 U

Logistics 110,000 120,000 10,000 F

Analysis: Production costs were higher than expected because

insertions of diodes and integrated circuits also drive costs (bothproduction and postpurchase costs).

Conclusion: The design of future products should try to

minimize total insertions.

Year Item Actual Costs Budgeted Costs Variance

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The

Balanced

Scorecard

The Balanced Scorecardtranslates

an organizations mission and

strategy into operational objectivesand performance measures for four

different perspectives:

The financial perspective

The customer perspective

The internal business

process perspective

The learning and growth

perspective

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Strategy, according to Robert Kaplan and

David Norton, is defined as

. . . choosing the market and customer

segments the business unit intends to serve,

identifying the critical internal and business

processes that the unit must excel at to

deliver the value propositions to customers

in the targeted market segments, and

selecting the individual and organizationalcapabilities required for the internal,

customer, and financial objectives.


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Testable Strategy

Illustrated

Quality

Training

Infra-

structure

Redesign

Products

Process

Reduce

Defective

Units

Increase

Customer

Satisfaction

Customer

Increase

Market

Share

Increase SalesFinancial Increase Profits

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Summary of Objectives and Measures:

Financial Perspective

Objectives Measures

Revenue Growth:

Increase the number of new Percentage of revenue

products from new products

Create new applications Percentage of repeat

customers

Develop new customers and Percentage of revenue from

markets new sourcesAdopt a new pricing strategy Product and customer

profitability

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Objectives MeasuresCost Reduction:

Reduce unit product cost Unit product cost

Reduce unit customer cost Unit customer cost

Reduce distribution channel cost Cost per distribution channel

Asset Uti l ization:

Improve asset utilization Return on investmentEconomic value added

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Customer PerspectiveObjectives Measures

Core:

Increase market share Market share (percentage of

market)Increase customer retention Percentage of repeat

customers

Increase customer acquisition Number of new customers

Increase customer satisfaction Ratings from customer

surveysIncrease customer profitability Customer profitability

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Objectives Measures

Performance Value:Decrease price Price

Decrease postpurchase costs Postpurchase costs

Improve product functionality Ratings from customer

surveysImprove product quality Percentage of returns

Increase delivery reliability On-time delivery percentage

Aging schedule

Improve product image and Ratings from customer

reputation surveys

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Actual Conversion Cost per Unit

Standard costs per minute = $1,600,000/400,000

= $4 per minuteActual cycle time = 60 minutes/10 units

= 6 minutes per unit

Actual conversion costs = $4 x 6= $24 per unit

Theoretical Conversion Cost per Unit

Theoretical cycle time = 60 minutes/12 units

= 5 minutes per unitTheoretical conversion

costs = $4 x 5

= $20 per unit

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Process PerspectiveObjectives Measures

Innovation:

Increase the number of new Number of new products vs.

products plannedIncrease proprietary products Percentage of revenue from

proprietary products

Decrease new product Time to market (from start

development time to finish)

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Objectives Measures

Operations:

Increase product quality Quality costsOutput yields

Percentage of defective units

Increase process efficiency Unit cost trends

Output/input(s)

Decrease process time Cycle time and velocity

MCE

Postsales Service:

Increase service quality First-pass yields

Increase service efficiency Cost trendsOutput/input(s)

Decrease service time Cycle time

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Learning and Growth PerspectiveObjectives Measures

Increase employee capabilities Employee satisfaction ratings

Employee turnover percentage

Employee productivity(revenue/employee)

Hours of training

Strategic job coverage ratio

(percentage of critical job

requirements filled)

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Objectives MeasuresIncrease motivation and Suggestions per employee

alignment Suggestions implemented per

employee

Increase information systems Percentage of processes withcapabilities real-time feedback

capabilities

Percentage of customer-facing

employees with on-line

access to customer andproduct information

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The End

Chapter Ten

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MAHM6e Ch10.Ab.az

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