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7/29/2019 Abm Hilton
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Hilton Maher Selto
7/29/2019 Abm Hilton
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Activity-Based Management
McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Activity-Based Management
(ABM)
Evaluates the
costs and values
of process
activities . . .
. . . To identify
opportunities to
improve
efficiency.
Activity-Based
Costing
Valued-Added
Analysis
Process
Improvements,
Customer Value, &
Reduced Costs
=+
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?ABM adds:
Identification of value-addedand non-value-added
activities
Activity-Based Management
4 Basic Steps Identify & classify the
activities related to the
companys products orservices.
Estimate the costs
associated with each
activity.
Calculate a cost-driver ratefor each activity.
Assign activity costs to
products using the cost-
driver rate.
Identifies the customerperceived value of each
activity
Identifies opportunities to
enhance value-addedactivities and reduce or
eliminate non-value-addedactivities
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1. Identify and measure the different levels of resource spending
2. Measure the costs of individual activities
3. Identify cost-driver bases and measure activity
cost-driver rates
4. Use cost-driver rates to assign activity costs to
products, jobs, services, and projects by multiplying theuse of cost driver base(s) by the cost driver rates
5. Analyze the profitability of products using
ABC unit-level and full costing.
The Steps Of ABC
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Activities
Create outcomesand consume resources
VALUE-ADDED ACTIVITIESenhance the value of products
and services in the eyes ofthe customer while meetingthe goals of the organization
NON-VALUE-ADDEDACTIVITIES
do not contribute to customerperceived value
The Importance Of Customer
Value
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Why do organizations have incentivesto eliminate non-value added activities?
Competitors areconstantly striving
to create more valuefor customers at
lower cost
The organization canapply the freed- upresources to value-
added activities ordistribute them to the
employees of theorganization.
Competition canappear quickly
Non-value Added Activities
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Most Likely Sources of Non-
Value-Added Activities
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If the answeris yes to
both it isvalue-added.
If the answeris no to
both or eitherit is non-
value-added.
YES YESNO NO
The test for valueadded activities
Identifying Value-Added
Activities
Would an externalcustomer encourage
the organization to domore of the activity?
Would the organizationbe more likely toreach its goal by
performing that activity?
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VALUE-ADDED
NON-VALUE-
ADDED
Rate on a scale of 1 to 5
Necessary Activities
Technological
Requirements
Policy
Requirements
Regulatory
Requirements
5 4 3 2 1
Neither value-added nor non-value-added
How Should An Organization
Measure Value-Added?
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Everyones knowledge is limited
Everyone is potentially biased in
his or her response
Use a team
approach
Who Should Perform The
Measurement Activity?
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Twin objectives
of
ABM
Identify non-value-added
activities to be eliminatedor reduced
Identify value-added
activities to be enhanced
Redesign processes to eliminate wasteful spending on
non-value-added activities
Tasks Required by Activity-
Based Management
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5 (highest) $100 3.3%
4 0 0.0%
3 1,200 40.0%
2 700 23.3%1 (lowest) 1,000 33.3%
Total $3,000 100.0%
By comparing the cost to the value of the task, we can identifyoversupplied 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
Sorting Activities By Cost
And Value
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Sub-Activity
Trim excess
plastic 83 min.
Recycle
trimmings 60 min.Put piece in
box 25 min.
Log out
completed
order 30 min.
Move order towarehouse 60 min.
Register order
in inventory 28 min.
Total elapsed
time 286 min.
Elapsed Time:
Before Process
Improvements
Ask Why? for each
step in the process.
Why#1: Appearance and product functionrequires 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 permitsleakage
Why#5: The molds are based on old designs
Why do employees need to trimexcess plastic from molded
products?
SOLUTION: Rework or replace oldmolds with improved molds to eliminate
the need for trimming and recycling.
Identifying Opportunities For
Process Improvement
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Sub-Activity
Trim excess
plastic 83 min.
Recycle
trimmings 60 min.Put piece in
box 25 min.
Log out
completed
order 30 min.
Move order towarehouse 60 min.
Register order
in inventory 28 min.
Total elapsed
time 286 min.
Elapsed Time:
Before Process
Improvements
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
Ask Why? for each
step in the process.
Identifying Opportunities For
Process Improvement
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After process
improvements,
total elapsed
time has been
reduced to82.2 minutes.
Sub-Activity
Trim excess
plastic 83 min. 0 min.
Recycle
trimmings 60 min. 0 min.Put piece in
box 25 min. 25 min.
Log out
completed
order 30 min. 15.1 min.
Move order towarehouse 60 min. 30 min.
Register order
in inventory 28 min. 12.1 min.
Total elapsed
time 286 min. 82.2 min.
Elapsed Time:
Before Process
Improvements
Elapsed Time:
Before Process
Improvements
If we assume a
cost of $10 perhour, what is
the cost
savings?
Identifying Opportunities For
Process Improvement
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Time Saved:286 min.
- 82.2 min.
203.8 min.
60 min/hr
3.397 hrs.
Sub-Activity
Trim excess
plastic 83 min. 0 min.
Recycle
trimmings 60 min. 0 min.Put piece in
box 25 min. 25 min.
Log out
completed
order 30 min. 15.1 min.
Move order towarehouse 60 min. 30 min.
Register order
in inventory 28 min. 12.1 min.
Total elapsed
time 286 min. 82.2 min.
Elapsed Time:
Before Process
Improvements
Elapsed Time:
Before Process
Improvements
Cost Savings:
3.397 hrs.
$10/hr.
$33.97
Identifying Opportunities For
Process Improvement
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The Focus ofABC
The Focus ofABM
Developing improvedproduct or service costs
given current processes
Identifying opportunitiesfor improving processes
Consider cost-benefits
Implementation Of Activity-
Based Costing & Management
I l t ti Of A ti it
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What Organizations Adopt ABC andABM?
Companies facing price competition
Companies producing many different,complex products from common
facilities
Implementation Of Activity-
Based Costing And
Management
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What is the scope of the ABC or ABM project?
Pilot ProjectOrganizationwide
System
Can You Be Sure That ABC
And ABM Will Be Successful?
What is a pilot
project?
A project of limitedscope that is intended
to be a small-scalemodel of an
organizational system.
Why use a pilot
project?
Anticipate the linkagesacross departments,
groups and processes.Anticipate the data
gathering and reportingrequirements.
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What resourcesare necessary?
ManagementCommitment
Personneland Time
Technology
Begin withexisting
commercialsoftware
Significant projects
will require a three-to four-person,cross-functionalteam at least fourto six months offull-time effort
Educate topmanagement
as tocost/benefits
Can You Be Sure That ABC
And ABM Will Be Successful?
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How can you anticipate and overcome resistance tochange?
Prevent or MinimizeResistance by:
Effects of Culture
Education and Training
Incentives that Encourageand Reward Change
Widespread Sponsorshipand Participation
Be Sensitive to Differencesin National Cultures
Can You Be Sure That ABC
And ABM Will Be Successful?
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ABC and ABM require information that is not normally availablefrom an organizations information systems
Thisinformation can
be generatedby:Observation
Interview
Survey
Can You Be Sure That ABC
And ABM Will Be Successful?
How do you gather information?
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END