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Hilton • Maher • Selto

Hilton • Maher • Selto. McGraw-Hill/Irwin. © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved . Activity-Based Management. Activity-Based Management (ABM). Evaluates the costs and values of process activities . . . . . . . To identify opportunities to improve efficiency.

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Hilton • Maher • Selto

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  1. Hilton • Maher • Selto

  2. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Activity-Based Management

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

  4. Activity-Based Management ABM adds: 4 Basic Steps • Identify & classify the activities related to the company’s products or services. • Estimate the costs associated with each activity. • Calculate a cost-driver rate for each activity. • Assign activity costs to products using the cost-driver rate. 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

  5. The Steps Of ABC 5. Analyze the profitability of products using ABC unit-level and full costing. 4. Use cost-driver rates to assign activity costs to products, jobs, services, and projects by multiplying the use of cost driver base(s) by the cost driver rates 3. Identify cost-driver bases and measure activity cost-driver rates 2. Measure the costs of individual activities 1. Identify and measure the different levels of resource spending

  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

  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 The organization can apply the freed- up resources to value-added activities or distribute them to the employees of the organization. Competition can appear quickly

  8. Most Likely Sources of Non-Value-Added Activities Transportation from suppliers and to customers Time and effort to move to processing Producing to build up inventory Waiting time for processing Producing defective products or services

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

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

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

  12. Tasks Required by Activity-Based 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

  13. Sorting Activities By CostAnd Value By comparing the cost to the value of the task, we can identify oversupplied non-value-added activities and undersupplied value-added activities. By focusing on those low-value tasks with high resource allocation, we can improve efficiency. Oversupplied non-value-added activities

  14. Identifying Opportunities For Process Improvement Ask “Why?” for each step in the process. Why do employees need to trim excess plastic from molded products? Why#1: Appearance and product function requires removal of the excess Why#2: Under high-injection pressure, plastic leaks from the edges of the mold Why#3: High pressure is required to mold the products properly Why#4: The design of the molds permits leakage Why#5: The molds are based on old designs SOLUTION: Rework or replace old molds with improved molds to eliminate the need for trimming and recycling.

  15. Identifying Opportunities For Process Improvement Ask “Why?” for each step in the process. Why are we spending so much time on non-value-added record keeping and the correction of recording errors? SOLUTION: Install a bar-coding system to mark and track all orders electronically A bar-coding system creates a unique bar code for each order and allows the company to mark and track all orders electronically

  16. Identifying Opportunities For Process Improvement After process improvements, total elapsed time has been reduced to 82.2 minutes. If we assume a cost of $10 per hour, what is the cost savings?

  17. Identifying Opportunities For Process Improvement Time Saved: 286 min. - 82.2 min. 203.8 min. ÷ 60 min/hr 3.397 hrs. Cost Savings: 3.397 hrs. × $10/hr. $33.97

  18. Implementation Of Activity-Based 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

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

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

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

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

  23. Observation Survey Interview Can You Be Sure That ABCAnd 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:

  24. END

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