10 -1 Activity- and Strategy-Based Responsibility Accounting CHAPTER.
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Transcript of 10 -1 Activity- and Strategy-Based Responsibility Accounting CHAPTER.
10 -1
Activity- and Strategy-Based Responsibility
Accounting
CHAPTER
10 -2
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.
ObjectivesObjectives
After studying this chapter, you should
be able to:
After studying this chapter, you should
be able to:
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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:
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Functional-based
Activity-based
Strategic-based
Types of Responsibility Accounting
Types of Responsibility Accounting
Management accounting offers the following three types of responsibility accounting systems.
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A functional-based responsibility accounting system assigns responsibility to organizational units and
expresses performance measures in financial terms.
Functional-Based Responsibility Accounting System
Functional-Based Responsibility Accounting 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
Responsibility Accounting System
Elements of a Functional-Based
Responsibility Accounting System
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Responsibility Is Defined
Individual in Charge
Operating Efficiency
Financial Outcomes
Unit Budgets
Static Standards
Standard Costing
Currently Attainable Stds.
Financial EfficiencyActual vs. Standard
Controllable CostsFinancial Measures
Performance Measures Are Established
Performance Is Measured
Individuals Are Rewarded Based on
Financial PerformanceProfit
Sharing
Promotions Bonuses
Salary Increases
Organizational Unit
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An activity-based responsibility accounting system assigns responsibility to processes and uses both
financial and nonfinancial measures of performance.
Activity-Based Responsibility Accounting System
Activity-Based Responsibility Accounting System
It is the responsibility accounting system developed for those firms operating in
continuous improvement environments.
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Elements of an Activity-Based Responsibility
Accounting System
Elements of an Activity-Based Responsibility
Accounting System
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Responsibility Is Defined
Team
Value Chain
Optimal
Process Oriented
Dynamic
Value-Added
Time Reductions
Cost Reductions
Quality ImprovementTrend Measures
Performance Measures Are Established
Performance Is Measured
Individuals Are Rewarded Based on Multidimensional
PerformanceGain-
Sharing
Promotions Bonuses
Salary Increases
Financial
Process
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Strategy-Based Responsibility Accounting System
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
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Elements of a Strategy-Based Responsibility
Accounting System
Elements of a Strategy-Based Responsibility
Accounting System
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Responsibility Is Defined
Financial
Process
Communica-tion Strategy
Alignment of Objectives
Balanced MeasuresLink to Strategy
Financial Measures
Process Measures
Customer MeasuresInfrastructure Measures
Performance 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 management’s attention on activities with the objective of improving customer value and the profit achieved by providing this value.
Activity-Based Management (ABM)
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 dimension and 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 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 AnalysisProcess Value Analysis
Process value analysis is concerned with:
Driver analysis
Activity analysis
Activity performance measurement
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Activity AnalysisActivity 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.
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Those activities necessary to remain in business are called
value-added activities.
Those activities necessary to remain in business are called
value-added activities.
Value-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.
Activities needed to comply with the reporting
requirements, such as the SEC, are value-added by a
mandate.
Value-Added
Activities
Value-Added
Activities
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A discretionary activity is classified as value-added provided it simultaneously satisfies three conditions:
Value-Added
Activities
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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All activities other than those essential to remain in business
are referred to as nonvalue-added activities.
All activities other than those essential to remain in business
are referred to as nonvalue-added activities.
Nonvalue-Added
Activities
Nonvalue-Added
Activities
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Nonvalue-Added
Activities
Nonvalue-Added
Activities
Scheduling
Moving
Waiting
Inspecting
Storing
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Activity Analysis
Activity elimination
Activity selection
Activity reduction
Activity sharing
Activity Analysis Can Reduce Costs in Four Ways:
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Efficiency
Quality
Time
Measures of Activity Performance
Measures of Activity Performance
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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
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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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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
Formulas
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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 Report
Value-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 25,000
Total $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 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.
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Act
Kaizen Cost Reduction ProcessKaizen Cost Reduction Process
Do Do
Kaizen Subcycle Maintenance Subcycle
Check
PlanSearch
Check
Act
StandardLock in
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Benchmarking uses best practices as the standard for
evaluating activity performance.
Benchmarking uses best practices as the standard for
evaluating activity performance.
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Activity Capacity Management
Activity capacity is 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
UnusedCapacity Variance
$40,000 F
Activity Capacity VarianceActivity Capacity Variance
SP x AQ$2,000 x 60
$120,000
SP x AU$2000 x 40
$80,000
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Life-Cycle Cost Commitment Curve
Planning Design Testing Production Logistics
100
90
80
70
60
50
40
30
20
10
Cost Commitment Curve
Life CycleCost %
90 percent of life-cycle costs are committed at this point
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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
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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 $ 6Unit life-cycle cost 10Unit whole-life cost 12Budgeted unit selling price 15
Life-Cycle Costing: Budgeted Costs and Income
Life-Cycle Costing: Budgeted Costs and Income
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Budgeted Costs
Development costs $200,000 ---- ---- $ 200,000Production costs ---- $240,000 $360,000 600,000Logistic costs ---- 80,000 120,000
200,000Annual 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 notincluded in the budgeted income e statement.
Item 2003 2004 2005 Item Total
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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 -42 Performance Report for Life-Cycle Costs
2003 Development $190,000 $200,000 $10,000F
2004 Production 300,000 240,000 60,000 ULogistics 75,000 80,000 5,000 F
2005 Production 435,000 360,000 75,000 ULogistics 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.
Year Item Actual Costs Budgeted Costs Variance
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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
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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 organizational
capabilities required for the internal, customer, and financial objectives.”
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Vision and Strategy
Financial
InfrastructureCustomer Process
Objectives
Measures
Targets
Initiatives
Strategy-Translation
Process
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Testable Strategy Illustrated
Testable Strategy Illustrated
Quality Training
Infra-structure
Redesign Products
ProcessReduce
Defective Units
Increase Customer
SatisfactionCustomer
Increase Market Share
Increase SalesFinancial Increase Profits
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Summary of Objectives and Measures:Financial Perspective
Objectives MeasuresRevenue 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
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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 Utilization:Improve asset utilization Return on investment
Economic value added
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Summary of Objectives and Measures:Customer Perspective
Objectives MeasuresCore:Increase market share Market share (percentage of
market)Increase customer retention Percentage of repeat
customersIncrease customer acquisition Number of new customersIncrease customer satisfaction Ratings from customer
surveysIncrease customer profitability Customer profitability
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Objectives MeasuresPerformance Value:Decrease price PriceDecrease postpurchase costs Postpurchase costsImprove product functionality Ratings from customer
surveysImprove product quality Percentage of returnsIncrease delivery reliability On-time delivery percentage
Aging scheduleImprove 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 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
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Summary of Objectives and Measures:Process Perspective
Objectives MeasuresInnovation:Increase the number of new Number of new products vs.
products plannedIncrease proprietary products Percentage of revenue from
proprietary productsDecrease new product Time to market (from start
development time to finish)
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Objectives MeasuresOperations:Increase product quality Quality costs
Output yieldsPercentage of defective units
Increase process efficiency Unit cost trendsOutput/input(s)
Decrease process time Cycle time and velocityMCE
Postsales Service:Increase service quality First-pass yieldsIncrease service efficiency Cost trends
Output/input(s)Decrease service time Cycle time
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Summary of Objectives and Measures:Learning and Growth Perspective
Objectives MeasuresIncrease employee capabilities Employee satisfaction ratings
Employee turnover percentage
Employee productivity (revenue/employee)
Hours of trainingStrategic job coverage ratio
(percentage of critical jobrequirements filled)
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Objectives MeasuresIncrease motivation and Suggestions per employee
alignment Suggestions implemented peremployee
Increase information systems Percentage of processes withcapabilities real-time feedback
capabilitiesPercentage of customer-
facingemployees with on-line access to customer andproduct information
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The EndThe End
Chapter Ten
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