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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 • 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 • Functional-based • Activity-based • Strategic-based Management accounting offers the following three types of responsibility accounting systems.
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.
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
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.
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
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
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
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 Process Dimension Driver Analysis Activities Performance Analysis Why? What? How well? Products and Customers Cost Dimension Resources
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
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.
Those activities necessary to remain in business are called value-added activities. Value-Added Activities
Activities needed to comply with the reporting requirements, such as the SEC, are value-added by a mandate. Value-Added Activities
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
All activities other than those essential to remain in business are referred to as nonvalue-added activities. Nonvalue-Added Activities
Scheduling • Moving • Waiting • Inspecting • Storing Nonvalue-Added Activities
Activity Analysis Activity elimination Activity selection Activity reduction Activity sharing Activity Analysis Can Reduce Costs in Four Ways:
Efficiency Quality Time 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 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
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
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
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
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 • 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.
Check Check Act Act Search Standard Plan Lock in Kaizen Cost Reduction Process Do Do Kaizen Subcycle Maintenance Subcycle
Benchmarking uses best practices as the standard for evaluating activity performance.
Activity Capacity Management • Activity capacity is the number of times an activity can be performed.
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 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 • 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
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
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
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.
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 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.
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
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.”
Financial Infrastructure Customer Process Objectives Strategy-Translation Process Measures Targets Initiatives Vision and Strategy
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 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
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
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
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