Topic 8-Lecture-ABM-2008 Revisi Maret 2014
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Transcript of Topic 8-Lecture-ABM-2008 Revisi Maret 2014
8/11/2019 Topic 8-Lecture-ABM-2008 Revisi Maret 2014
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P. 1
Process Control and Activity
Based Management Monitoring Systems
Applications of ABC
The first applications of ABC were in productcosting and profi t measurement of products and
customers (discussed earlier).
ABC could become an important tool in other areas
- such as Process Control or Activity BasedManagement (ABM).
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P. 2
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P. 3
Definitions and Objectives
"Process Control" is the short-term control of
operational processes within an organisation.Its function is to measure processes' outcomes and
to take corrective action when the measured
outcomes deviate from those desired.
Usually "process control" refers to the physicalmanufactur ing process.
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P. 4
Process control in a broader sense - is known as
"Activity Based Management", e.g.. to manage the
activities of:
design engineering
Personnel Administration
purchasing
Promotionprocess planning
Repairs and Maintenance
production planning
Legal Affairs
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P. 5
Measuring the Performance of a Process
Ef f iciency or Productivity:
This can be measured in terms of output unitsdivided by input quantity (for example, labour
hours).
The result is the "output-input ratio" - and is
called "productivity" or "efficiency".Price Relationship or Recovery: This is the ratio of
output prices to input prices
Overall Effectiveness: This is the monetary value of
all products sold, divided by the value of allresources consumed
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P. 6
Overall Effectiveness =Output quantities
Input quantities
xOutput prices
Input prices
(efficiency or productivity) (price relationship or price recovery)
(For multiple inputs and/or outputs, some
kind of mathematical weighting technique isneeded.)
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P. 7
The Measurement Phase of Process Control
This resembles the control of "guided missiles" or industrial robots, rather than accounting.
Modern machine tools have gauges which canmeasure every individual item in a productionbatch - with pinpoint accuracy.
Even after the production stage, the flow of
products along the desired channels is very easyto measure due to:
– Bar Coding
– Electronic Scales and escort memories
– Laser memories – Relational-Data Bases etc.
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P. 8
Monitoring Indirect Departments (i.e. ActivityBased Management)
White-collar employees have not received nearlyas much attention as production workers -although in modern industrial settings theyaccount for an increasing proportion of theoverhead cost .
The reason is that monitoring of "indirectdepartments", which embrace (amongst others)the knowledge workers, is more difficult.
"Input" can be measured fairly well with thehelp of "working-time" registration, e.g.:
– time cards (becoming very obsolete)
– cost invoices
"Output" is the main problem
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P. 9
Example: Sales Department
TRADITIONAL VIEW
Salaries
Benefits
Travel
Car
Occupancy
Telephone
4,000
400
700
300
300
500
6,500
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P. 10
Example: Sales Department
TRADITIONAL VIEW
Salaries
Benefits
Travel
Car
Occupancy
Telephone
4,000
400
700
300
300
500
6,500
ACTIVITY BASED VIEW
Visit Customers
Travel
Process Orders
Check prices, delivery
Chase Factory
Meetings
1,400
1,200
700
800
800
1,600
6,500
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P. 11
ABC provides a new approach to implementing changein white collar departments (WCDs).
See : Traditional objectives of White collar Heads of Dept
versus Activity Based Budgeting (See 8CN – 8)
The key innovation is to use Cost Dr ivers as anapproximation the output of the various departments,e.g.: - number of routings
– number of drawings – number of purchase orders
This is quite natural, since cost drivers explain why acertain activity will consume a certain amount ofresources.
However, these do not include information about:
– the quality of the output, or
– the difficulties inherent in the task.SEE VIDEO OF ABM PART I
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P. 12
Activities
Resources
Cost Objects
PerformanceMeasures
Cost Drivers
Activity Based Costing(Cost Allocation View)
Activities
Based
Management
(Process View)
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P. 13
ABM in a Telco – SEE FIRST VIDEO ABM PART I I : ACTIVITY ANALYSIS 15”
PURCHASING DEPARTMENT
Activi t ies
%
Time
Annual
Cost $
Unit
Cost $
PROCESS REQUISITIONS 10,000 re . .a.
Clarify details
Pre are s ec if ic atio ns
Obtain quotes
Vendor ueries
Negotiate & s elect vendo r
Generate ord ers
Generate amended o rders
EXPEDITE ORDERS (1,000 orders)
Vendor ueries
Chase late orders
Amend orders
Urgent supply/stockouts
PROCESS RECEIPTS (15,000 receip ts)
Check of oods received
F/U shor t deliveries F/U back orders
Cancel orders
Pre are re o rt s and adm in is tr at ion
TOTAL
Com leted re u is it ions 9,500
13
2
1
3
1
5
11
36
6
4
9
10
29
1
8 2
1
23
35
100
16,430
2,530
1,265
3,790
1,265
6,320
13,900
45,500
7,590
5,055
11,375
12,640
36,660
1,265
10,110 2,530
1,265
29,070
44,240
126,400
4.50
36.66
2.95
13.30
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P. 14
Value-Adding/Non-Value Adding Work
13% of time spent clarifying details $16,430
11% of time generating amended orders $13,900
29% of time expediting orders $36,660
53% of time wasted $66,990
23% of time spent on administration $29,070
Actual Value Added Work:
Specifications 2% $2,530
Obtain quotes 1% $1,265
Negotiate vendors 1% $1,265
Generate orders 5% $6,320
Check goods received 1% $1,26510% $12,645
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P. 15
ABM in a Telco Service Unit
Improved product data can be made available
Product 1 Product 1
Labour
Materials
Overhead
TOTAL
450
100
100
650
Act ivat ions
Network Maintenance
Product Design
Service Changes
Custom er Quer ies
TOTAL
185
175
150
40
100
650
Process Improvements - Activation
– Determined 35% of activations were reserviced within 7days
– 45% of time was idle time
– Activation costs between regions fluctuated by up to 35%
– Best internal unit activation cost was within 5% of best inclass
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P. 16
SEE VIDEO ABM PART I : 20”
THE APPLICATION OF ABM AT :
- BC TEL
- KANTHAL
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P. 17
Activity Based Budgeting
Traditional budgeting implies:
– level by level allocation of overhead costs fromsupporting cost centres to production cost centres
(using a volume related allocation base).
– "common backpacks" carried by production cost
centre are often a source of discontent. Activity Based Budgeting (ABB) is an extension of
Activity Based Management (ABM) undertaken to
improve the planning and effectiveness of White-
Collar Departments
Contoh pengembangan ABB : Reading 8 B : Linking Strategy Based Costing & Innovation Based Budgeting
Reading 8D dan 8 E: Beyond Budgeting
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P. 18
Number of
customers
Number
orders
Number
export
orders
Number of
despatches
Price list
and sales
literature
sustaining cost
Department
sustaining
cost
Total
Management salary
Clerical salaries
OvertimeStationery and
consumables
IT costs
Other costs
-
30
-
-
8
3
-
80
-
8
12
4
-
70
10
3
4
2
-
40
15
4
8
6
10
20
-
30
-
7
30
-
-
-
-
10
40
240
25
45
32
32
Total $41 $104 $89 $73 $67 $40 $414
Volume of activityCost per unit
activity
650
$63
2300
$45
500
$178
6000
$12
-
$67,000
-
$40,000
Activity Cost Budget for a Sales Order Department (Figures in $000s)
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P. 19
Activity Based Cost Variance Analysis
Consider, for example, a whi te-col lar department like purchasing, and how it relates to one product
via one cost driver.
Assume that the values of the following variablesare known:
– The budgeted and actual costs of the activity
(the total cost of running the purchasingdepartment).
– The budgeted and actual number ofoccurrences of the cost driver (the number ofpurchase orders).
– The budgeted and actual sales volume (number of, say, refrigerators sold).
These three variables are the basis of aquantitative analysis.
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P. 20
Budget Ab =
$30,000Actual Aa =$28,000
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P. 21
Budget Ab =
$30,000Actual Aa =$28,000
Nb = 1,000eventsNa = 880events
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P. 22
Ub = 10,000units
Ua = 11,000units
Budget Ab =
$30,000Actual Aa =$28,000
Nb = 1,000eventsNa = 880events
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P. 23
Traditional var iance analysis will use volume to "flex"
the budget to "standard cost allowed for actual
output". Thus: – standard cost allowed per unit = $30,000/10,000 = $3
p.u.
– actual cost per unit = $28,000/11,000 = $2.55 p.u.
– Thus, the variance would be considered "favorable".
In Activity Based Cost Variance Analysis the cost-
driver would be used to "flex" the budget. Thus:
– standard cost allowed per unit = $30,000/1,000 = $30
p.unit of activity
– actual cost allowed for actual output = $28,000/880 =$31.82 p.u.
– The productivity of the activity is thus lower than the
target - i.e. "unfavorable".
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P. 24
Responsibility Accounting" under ABM
As one can see, the budgeted number of cost-
driver events was too high (1,000 vs. 880) The estimation of the budgeted amount of cost
drivers that will be required is the responsibility
of the product manager (refrigerator line
manager) who will base this estimation on thenumber of parts that will be required to
manufacture the refrigerators.
The product manager has control over the
number of cost drivers (purchasing orders)
required, and can reduce this number, e.g. by
reducing the number of parts used, if this is
feasible.
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P. 25
Therefore, based on the predicted workload, if toomany purchasing people are hired, say, this is not thefault of the purchasing manager, but the manager
who forecasts the demands that were going to bemade of the purchasing department (i.e., the productmanager).
The head of a service (purchasing) cost center has toonly:
– control and record the level of the activity andobserve the number of cost drivers.
– record idle time (over capacity) in his or herdepartment.
Otherwise, he or she might be blamed for having aproductivity decrease when productivity has, in fact,increased (i.e., spent $28,000 instead of $30,000).
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P. 26
Cost Follow-up of a Customer Order Under ABM
Example: A customer orders a product consisting of400 components. Most of the components are
standard parts, but 20 require new drawings becauseof minor changes. Two of the components have neverbeen manufactured and cannot be pur chased, leavingthe R & D department to design and develop them .The factory estimates the number of manufacturingorders at 120, machine hours at 300 and directlabour hours at 200. The mater ial value is forecast at$20,000, and it is necessary to order 50 dif ferentcomponents from subcontractors. F inall y, thewarehouse department estimates the number ofissues (parts taken out f rom the inventory) at 250.The number of cost-driver events is estimated asshown in the figure.
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P. 27
Cost Driver Estimates
Type of cost A. B. Cost Estimate
Number of cost-
drivers
$ each Total
Direct material
Material overhead for
purchased order
Material overhead forstock issues
Direct labour
Machine hours
Production planning
Design and process
planning
Part numbermaintenance
R&D
Customer order
processing
-
50 products
250 issues
200 hours
300 hours
120 orders
20 new drawings
400 products
2 new parts
1 customer order
-
70
12
90
80
250
500
20
2,500
8,000
20,000
3,500
3,000
18,000
24,000
30,000
10,000
8,000
5,000
8,000
Total - - 129,500
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P. 28
Let us assume that the “actual cost” information
was\as follows:
– Direct Material Costs: $ 19,500 – Direct Labour Costs: $17,100
– Direct Labour Hours: 190 hours
Traditional accounting „cost follow-up‟ would
have shown that: COSTESTIMATE
ACTUAL/ALLOCATED
VARIANCE
Direct Materials
Direct Labour
Allocated O/H‟s (per DLH)
$20,000
$18,000
$91,500
$129.500
$19,500
$17,100
*$86,925
$123.525
+ 500
+ 900
+ 4575
+5975
* ÷ =
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P. 29
Cost Driver Actuals
Type of cost A. B. Cost Estimate Actual Costs
Number of cost-
drivers
$ each Total Number of
cost-drivers
Total
Direct material
Material overhead forpurchased order
Material overhead forstock issues
Direct labour
Machine hoursProduction planning
Design and process
planning
Part numbermaintenance
R&D
Customer order
processing
-
50 products
250 issues
200 hours
300 hours120 orders
20 new drawings
400 products
2 new parts
1 customer order
-
70
12
90
80250
500
20
2,500
8,000
20,000
3,500
3,000
18,000
24,00030,000
10,000
8,000
5,000
8,000
-
45
260
190
310135
28
400
2
1
19,500
17,100
Total - - 129,500 -
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P. 30
Activity-Based Cost Follow-up
ORDER-COST VARIANCE
Type of cost A. B. Cost Estimate A. B. Cost Follow-up Variance
Number of cost-drivers
$ each Total Number of cost-
drivers
Total
Direct materialMaterial overhead for purchased orderMaterial overhead for stock issuesDirect labourMachine hoursProduction planningDesign and process planningPart number maintenance
R&DCustomer order processing
-
50 products
250 issues200 hours300 hours
120 orders
20 new drawings
400 products
2 new parts
1 customer order
-
70
129080
250
500
20
2,500
8,000
20,000
3,500
3,00018,00024,00030,000
10,000
8,000
5,000
8,000
-
45
260190310135
28
400
2
1
19,500
3,150
3,12017,10024,30033,750
14,000
8,000
5,000
8,000
500
350
-120900
-800-3,750
-4,000
0
0
0
Total - - 129,500 - 136,420 -6,900
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P. 31
The ABM methods supplies a prompt warning :
management is being overly optimistic in its assessment of
new drawings and manufacturing orders when issuing
quotations for this group of products
By using conventional calculation methods, management
would have discovered negative differences at the end ofthe budget period, but would have hav only very limited
capacity to track the real problems (such as letting the
salesman and designers create too many part numbers on
a fixed price customer order)
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P. 32
Feedback systems under ABM The costing system’s business control aspects are extremely
important. Feedback is required concerning non-financialvariables like new drawings, stock issues, etc.
This feedback allows a variety of corrective actions to be
taken
Thus, per iodical activity-based budgeting combined with" real-time" activity -cost fol low-up offers an excellent
instrument to measure the monetary consequences of
making a mul ti tude of small decisions , even in whi te-col lar
support department See paper : 8 F : Mgr reaction to unfavorable budget
variance
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P. 33
Other illustration of application ABM in service dept :
Reading 8 C : Managing Shared Services with ABM
Figure 1 and 2
Other development :
Reading 8 A : Measurement unused capacity in timedriven ABC
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P. 34
Activity Based Management: The Issues
What is the Key Performance Variables that should
be Measured (Top-down or Bottom-up?) (Top ofCamel Example)
How Frequent must Reports Be?
The Problems with Monthly Reporting (the Top-
Down Approach)What about Timeliness vs Accuracy?
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P. 35
Activity Based Management: The Issues
What is the Key Performance Variables that should be
Measured
- Process control is more concerned with the
„technician level‟ parts of a company than with the
„strategic level‟ whole.
- In contrast to control systems imposed from the topdown by accountancy based method (most often
using financial measures such as ROI, ROA, etc –
Local process control and performance
measurement systems have to be extremely varied
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P. 36
Activity Based Management: The Issues
How Frequent must Reports Be?
The Problems with Monthly Reporting (the Top-
Down Approach)
– too late, inappropriate measure, valueless
Every activity should be analyzed according to
its informational needs (the Bottom up
approach)
- in production : repetitive…daily
- in R & D : long periods
See „The Octopus Syndrome in Inf Processing‟ 8CN-15
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What about Timeliness vs Accuracy?
A monthly report 90 % accurate on the last day of a month may be more
useful for short term decision making purposes than a 99.9 %
accurate report on the 15th
of the next month. However the latterreport may not satisfy accountants with their need for auditable data
– DIFFERENT COSTS FOR DIFFERENT PURPOSES
Benef it
>
<
Accuracy
Timeliness
Accuracy-Timelines Trade-off
Benefit
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P. 38
What Level of Detail is Required?
The responsibility for the design of process control systems
(Top down or Bottom up)
Executive Information System : an example of thedifferent usage of the report and indicators at each level
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P. 39
Executive Information Systems
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P. 40
CORPORATE
PRODUCTIONMANAGER
PLANTMANAGER
DEPARTMENT
SUPERVISOR
PROCESSDRIVERS
Returnon Assets
InventoryDays
Output /Equipment $
Output /Square feetOccupied
ManufactureCycle Time
Machine
Down time
DefectiveAssembly
Finished GoodsInventory Days
DaysVendor
Lead Time
$ Good Output
/ Total Output
# UnplannedSchedule
changes
PartsAvailability
Wait onQC
No ManpowerPowerFailure
Chang coverTimes
Critical Success Factor - Resource Management