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Activity- and Strategy-Based Responsibility Accounting. CHAPTER. Objectives. 1. Compare and contrast functional-based, activity-based, and strategic-based responsibility accounting systems. 2. Explain process value analysis. 3. Describe activity performance measurement.

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slide2

Objectives

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 the Balanced Scorecard.

After studying this chapter, you should be able to:

responsibility accounting model
Responsibility Accounting Model
  • Assigning responsibility
  • Establishing performance measures or benchmarks
  • Evaluating performance
  • Assigning rewards

The responsibility accounting model is defined by four essential elements:

types of responsibility accounting
Types of Responsibility Accounting
  • Functional-based
  • Activity-based
  • Strategic-based

Management accounting offers the following three types of responsibility accounting systems.

slide5

Functional-

Based Responsibility Accounting System

  • A functional-based responsibility accounting system assigns responsibility to organizational units and expresses performance measures in financial terms.

It is the responsibility accounting system that was developed when most firms were operating in relatively stable environments.

slide7

Actual vs. Standard

Individual in Charge

Operating Efficiency

Profit Sharing

Unit Budgets

Static Standards

Financial Efficiency

Financial Outcomes

Standard Costing

Currently Attainable Stds.

Organizational Unit

Controllable Costs

Financial Measures

Performance Measures Are Established

Performance Is Measured

Promotions

Individuals Are Rewarded Based on Financial Performance

Bonuses

Salary Increases

Responsibility Is Defined

slide8

Activity-

Based Responsibility Accounting System

  • An activity-based responsibility accounting system assigns responsibility to processes and uses both financial and nonfinancial measures of performance.

It is the responsibility accounting system developed for those firms operating in continuous improvement environments.

slide10

Gain- Sharing

Cost Reductions

Process Oriented

Time Reductions

Quality Improvement

Trend Measures

Process

Value-Added

Team

Value Chain

Financial

Optimal

Dynamic

Performance Measures Are Established

Performance Is Measured

Promotions

Individuals Are Rewarded Based on Multidimensional Performance

Bonuses

Salary Increases

Responsibility Is Defined

slide11

Strategy-

Based Responsibility Accounting System

A strategic-based responsibility accounting system(Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives:

The financial perspective

The customer perspective

The process perspective

The infrastructure (learning and growth) perspective

slide13

Gain- Sharing

Process Measures

Financial Measures

Customer Measures

Infrastructure Measures

Link to Strategy

Customer

Financial

Process

Infrastructure

Communica-tion Strategy

Balanced Measures

Performance Measures Are Established

Alignment of Objectives

Performance Is Measured

Promotions

Individuals Are Rewarded Based on Multidimensional Performance

Bonuses

Salary Increases

Responsibility Is Defined

slide14

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.

The activity-based management model has two dimension: a cost dimension and a process dimension.

activity based management model
Activity-Based Management Model

Process Dimension

Driver Analysis

Activities

Performance Analysis

Why?

What?

How well?

Products and Customers

Cost Dimension

Resources

slide16

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
  • Activity performance measurement
slide17

Activity Analysis

Activity analysis is the process of identifying, describing, and evaluating the activities an organization performs.

Activity analysis should produce four outcomes:

  • What activities are done.
  • 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.
slide18

Those activities necessary to remain in business are called value-added activities.

Value-Added Activities

slide19

Activities needed to comply with the reporting requirements, such as the SEC, are value-added by a mandate.

Value-Added Activities

slide20
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.

Value-Added Activities

slide21

All activities other than those essential to remain in business are referred to as nonvalue-added activities.

Nonvalue-Added Activities

slide22

Scheduling

  • Moving
  • Waiting
  • Inspecting
  • Storing

Nonvalue-Added Activities

activity analysis
Activity Analysis

Activity elimination

Activity selection

Activity reduction

Activity sharing

Activity Analysis Can Reduce Costs in Four Ways:

efficiency quality time
Efficiency

Quality

Time

Measures of Activity Performance

measures of activity performance
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
  • Life-cycle costing
value and nonvalue added cost reporting
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

slide27

Value-added standards call for their elimination

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

slide28

Formulas

Value-added costs = SQ x SP

Nonvalue-added costs = (AQ – SQ)SP

Where SQ = The value-added output level of an activity

SQ = The standard price per unit of activity output measure

AQ = The actual quantity used of flexible resources or the practical activity capacity acquired for committed resources

slide29
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 Report

Value-Added Nonvalue- Actual

Activity Costs Added Costs Costs

slide30
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 25,000

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

Trend Report: Nonvalue-Added Costs

Nonvalue-Added Costs

Activity 2003 2004 Change

the role of kaizen standards
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.
slide32

Check

Check

Act

Act

Search

Standard

Plan

Lock in

Kaizen Cost Reduction Process

Do

Do

Kaizen Subcycle

Maintenance Subcycle

activity capacity management
Activity Capacity Management
  • Activity capacity is the number of times an activity can be performed.
slide35
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 AQ

$2,000 x 60

$120,000

SP x AU

$2000 x 40

$80,000

Activity Capacity Variance

SP x SQ

$2,000 x 0

$0

Activity

Volume Variance

$120,000 U

Unused

Capacity Variance

$40,000 F

life cycle cost commitment curve
Life-Cycle Cost Commitment Curve

90 percent of life-cycle costs are committed at this point

Life Cycle

Cost %

100

90

80

70

60

50

40

30

20

10

Cost Commitment Curve

Planning Design Testing Production Logistics

target costing
Target Costing
  • A target cost is the difference between the sales price needed to capture a predetermined market share and the desired per-unit profit.

Example: Current product specifications and the targeted market share call for a sales price of $250,000. The required profit is $50,000 per unit. The target cost is computed as follows:

$250,000 – $50,000 = $200,000

slide38

Market Share Objective

Target Price

Product Functionality

Target Profit

Target Cost

Product and Process Design

Target Cost Met?

NO

YES

Produce Profit

Target-Costing Model

slide39

Life-Cycle Costing: Budgeted Costs and Income

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

slide40

Budgeted Costs

Item 2003 2004 2005 Item Total

Development costs $200,000 ---- ---- $ 200,000

Production costs ---- $240,000 $360,000 600,000

Logistic costs ---- 80,000 120,000 200,000

Annual subtotal $200,000 $320,000 $480,000 $1,000,000

Postpurchase costs --- 80,000 120,000 200,000

Annual total $200,000 $400,000 $600,000 $1,200,000

Units produced 40,000 60,000

Note: The post purchase costs are costs incurred by the customer and are not

included in the budgeted income e statement.

slide41

Budgeted Product Income Statements

Annual Cumulative

Year Revenues Costs Income Income

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

performance report for life cycle costs
Performance Report for Life-Cycle Costs

Year Item Actual Costs Budgeted Costs Variance

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 (both production and postpurchase costs).

Conclusion:The design of future products should try to minimize total insertions.

slide43

The Balanced Scorecard

The Balanced Scorecard translates an organization’s mission and strategy into operational objectives and performance measures for four different perspectives:

  • The financial perspective
  • The customer perspective
  • The internal business process perspective
  • The learning and growth perspective
slide44

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 organizational capabilities required for the internal, customer, and financial objectives.”

slide45

Financial

Infrastructure

Customer

Process

Objectives

Strategy-Translation Process

Measures

Targets

Initiatives

Vision and Strategy

slide46

Increase Sales

Increase Profits

Increase Customer Satisfaction

Increase Market Share

Reduce Defective Units

Redesign Products

Quality Training

Infra-structure

Financial

Customer

Process

Testable Strategy Illustrated

summary of objectives and measures financial perspective
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 sources

Adopt a new pricing strategy Product and customer profitability

slide48

Objectives Measures

Cost Reduction:

Reduce unit product cost Unit product cost

Reduce unit customer cost Unit customer cost

Reduce distribution channel cost Cost per distribution channel

Asset Utilization:

Improve asset utilization Return on investment

Economic value added

slide49

Summary of Objectives and Measures:Customer Perspective

Objectives 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

surveys

Increase customer profitability Customer profitability

slide50

Objectives Measures

Performance Value:

Decrease price Price

Decrease postpurchase costs Postpurchase costs

Improve product functionality Ratings from customer

surveys

Improve product quality Percentage of returns

Increase delivery reliability On-time delivery percentage

Aging schedule

Improve product image and Ratings from customer

reputation surveys

slide51

Actual Conversion Cost per Unit

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

= $4 per minute

Actual 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 unit

Theoretical conversion

costs = $4 x 5

= $20 per unit

slide52

Summary of Objectives and Measures:Process Perspective

Objectives Measures

Innovation:

Increase the number of new Number of new products vs.

products planned

Increase proprietary products Percentage of revenue from

proprietary products

Decrease new product Time to market (from start

development time to finish)

slide53

Objectives Measures

Operations:

Increase product quality Quality costs

Output 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 trends

Output/input(s)

Decrease service time Cycle time

slide54

Summary of Objectives and Measures:Learning and Growth Perspective

Objectives 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)

slide55

Objectives Measures

Increase motivation and Suggestions per employee

alignment Suggestions implemented per

employee

Increase information systems Percentage of processes with

capabilities real-time feedback

capabilities

Percentage of customer-facing

employees with on-line

access to customer and

product information