19-1 Copyright Houghton Mifflin Company. All rights reserved. Chapter 19 Activity-Based Systems: Activity-Based Management and Just-in-Time Belverd

19-19-11Copyright Houghton Mifflin Company. All rights reserved.

Chapter 19Chapter 19Activity-Based Systems:Activity-Based Systems:

Activity-Based Management Activity-Based Management and Just-in-Timeand Just-in-Time

Belverd E. Needles, Jr.Belverd E. Needles, Jr.Marian PowersMarian PowersSherry K. MillsSherry K. Mills

Henry R. AndersonHenry R. Anderson- - - - - - - - - - -- - - - - - - - - - -

Multimedia Slides by:Multimedia Slides by:Dr. Paul J. RobertsonDr. Paul J. Robertson

New Mexico State UniversityNew Mexico State University

Steve LeaskSteve LeaskNew Mexico State UniversityNew Mexico State University


Activity-Based Management Activity-Based Management and Activity-Based Costingand Activity-Based Costing

OBJECTIVE 2OBJECTIVE 2

Define Define activity-based management activity-based management

(ABM)(ABM) and discuss its relationship and discuss its relationship

with the supply chain and value with the supply chain and value

chain.chain.


Activity-Based ManagementActivity-Based Management» Activity-based management (ABM) is Activity-based management (ABM) is

an approach to management that an approach to management that includes:includes:

Identifying all major operating activities.Identifying all major operating activities.

Determining what resources are Determining what resources are consumed by each activity.consumed by each activity.

Categorizing the activities as either Categorizing the activities as either adding value to a product or service or adding value to a product or service or not adding value.not adding value.


Activity-Based ManagementActivity-Based Management» ABM provides financial and ABM provides financial and

operational performance information operational performance information at the activity level that:at the activity level that: Is helpful for making decisions about Is helpful for making decisions about

business segments.business segments.

Helps managers eliminate waste and Helps managers eliminate waste and inefficiencies and redirect resources to inefficiencies and redirect resources to activities that add value to the product activities that add value to the product or service.or service.


Supply Chains andSupply Chains andValue ChainsValue Chains

» Two tools of ABM, supply chains and Two tools of ABM, supply chains and

value chains, help managers better value chains, help managers better

understand their organization’s understand their organization’s

external and internal operations.external and internal operations.


Supply ChainSupply Chain

» A supply chain is an interdependent A supply chain is an interdependent

collection of organizations that collection of organizations that

supplies materials, products, or supplies materials, products, or

services to a customer.services to a customer.

A supply chain includes suppliers and A supply chain includes suppliers and

suppliers’ suppliers as well as suppliers’ suppliers as well as

customers and customers’ customers.customers and customers’ customers.


Value ChainValue Chain» A value chain is a related sequence of A value chain is a related sequence of

value-creating activities within an value-creating activities within an

organization.organization.

It helps managers better understand It helps managers better understand

the interdependencies of those the interdependencies of those

activities.activities.

A company’s value chain is part of its A company’s value chain is part of its

supply chain.supply chain.


Value ChainValue Chain When organizations work cooperatively When organizations work cooperatively

with others in their supply chain or with others in their supply chain or

larger value chain, new processes can larger value chain, new processes can

be introduced or existing processes be introduced or existing processes

redesigned to reduce the total cost of redesigned to reduce the total cost of

products or services.products or services.


Value-Adding and Value-Adding and Nonvalue-Adding Activities Nonvalue-Adding Activities and Process Value Analysisand Process Value Analysis


Distinguish between value-Distinguish between value-

adding and nonvalue-adding adding and nonvalue-adding

activities, and describe process activities, and describe process

value analysis.value analysis.


Value-Adding ActivitiesValue-Adding Activities» A value-adding activity is an activity that A value-adding activity is an activity that

adds value to a product or service from adds value to a product or service from the customer’s perspective. Examples the customer’s perspective. Examples include:include:

Assembling a car.Assembling a car.

Painting a car.Painting a car.

Installing brakes on a car.Installing brakes on a car.


Nonvalue-Adding ActivitiesNonvalue-Adding Activities» A nonvalue-adding activity is an activity A nonvalue-adding activity is an activity

that adds cost to a product or service that adds cost to a product or service but does not increase its market value. but does not increase its market value. Examples include:Examples include:

Moving materials.Moving materials.

Storing materials.Storing materials.


Process Value AnalysisProcess Value Analysis

» Process value analysis (PVA) is an Process value analysis (PVA) is an

analytical method of identifying all analytical method of identifying all

activities and relating them to events activities and relating them to events

that cause or drive the need for the that cause or drive the need for the

activities and the resources activities and the resources

consumed.consumed.


Costs and ResourcesCosts and Resources

» By identifying nonvalue-adding By identifying nonvalue-adding

activities, organizations can reduce activities, organizations can reduce

costs and redirect resources to costs and redirect resources to

value-adding activities.value-adding activities.


Value-Adding ActivitiesValue-Adding Activitiesfor a Service Organizationfor a Service Organization

Western Data Services, Inc.Value-Adding Activities for the Classic Letter

Value-Adding Activities How the Activity Adds Value

Design the letter Enhances the effectiveness of the communication

Create a database of customer Increases the probability that the clientnames and addresses sorted in will efficiently and effectively reach the ZIP code order targeted customer group

Verify the conformity of mailing Ensures that the client’s mailing willinformation with USPS receive the best postal raterequirements

Process the job Creates the client mailing

Deliver the letters to the post office Begins the delivery process


ImplementingImplementingActivity-Based CostingActivity-Based Costing


Define a Define a cost hierarchy,cost hierarchy, describe describe

its elements, and explain how a its elements, and explain how a

cost hierarchy and a bill of cost hierarchy and a bill of

activities are used in activity-based activities are used in activity-based

costing.costing.


Cost HierarchyCost Hierarchy» Many companies use a cost hierarchy Many companies use a cost hierarchy

to manage the assignment of activity-to manage the assignment of activity-based costs.based costs.

» A cost hierarchy for a manufacturer A cost hierarchy for a manufacturer typically has four levels:typically has four levels: Unit level.Unit level.

Batch level.Batch level.

Product level.Product level.

Facility level.Facility level.


Unit-Level ActivitiesUnit-Level Activities» Unit-level activities are performed Unit-level activities are performed

each time a unit is produced:each time a unit is produced:

Insertion of a component during Insertion of a component during

assembly.assembly.


Batch-Level ActivitiesBatch-Level Activities» Batch-level activities are performed Batch-level activities are performed

each time a batch of goods is produced:each time a batch of goods is produced:

These activities vary with the number These activities vary with the number

of batches prepared.of batches prepared.

Examples: setup, scheduling, and Examples: setup, scheduling, and

material handling.material handling.


Product-Level ActivitiesProduct-Level Activities» Product-level activities are performed Product-level activities are performed

to support the diversity of products in to support the diversity of products in

a manufacturing plant. Examples a manufacturing plant. Examples

include:include:

Implementing engineering change Implementing engineering change

notices.notices.

Redesigning the installation process.Redesigning the installation process.


Facility-Level ActivitiesFacility-Level Activities» Facility-level activities are performed to Facility-level activities are performed to

support a facility’s general manufacturing support a facility’s general manufacturing

process. Examples include:process. Examples include:

Lighting the manufacturing plant.Lighting the manufacturing plant.

Securing the manufacturing plant.Securing the manufacturing plant.

Insuring the manufacturing plant.Insuring the manufacturing plant.


Cost HierarchyCost Hierarchy

» The cost hierarchy includes both The cost hierarchy includes both

value-adding and nonvalue-adding value-adding and nonvalue-adding


» The frequency of activities varies The frequency of activities varies

across activity levels.across activity levels.


Sample Activities in Cost HierarchiesSample Activities in Cost Hierarchies

Activity LevelCar Manufacturer:Engine Installation

Direct Mail Service:Preparing BankCustomer Mailing

Unit level Install engineTest engine

Print and fold letterInsert letter and other information into envelopeSeal and meter envelope

Batch level Set up installation processMove engines

Retool machinesVerify correct postageBill client

Product orservice level

Redesign installation process

Train employeesDevelop and maintain computer systems and databases

Facility oroperations level

Provide facility management, maintenance, lighting, security, and space

Provide facility management, maintenance, lighting, security, and space

Inspect engines


Bill of ActivitiesBill of Activities

» A bill of activities is a list of activities A bill of activities is a list of activities

and related costs that is used to and related costs that is used to

compute the costs assigned to compute the costs assigned to

activities and the product unit cost.activities and the product unit cost.


Bill of ActivitiesBill of Activities

» A bill of activities may be used as the A bill of activities may be used as the primary document or a supporting primary document or a supporting schedule to calculate the product unit schedule to calculate the product unit cost in job order or process costing.cost in job order or process costing.

» More complex bills of activities More complex bills of activities include cost pool rates and cost include cost pool rates and cost driver levels used to assign costs to driver levels used to assign costs to cost objects.cost objects.


Q.Q. What are the four cost hierarchy What are the four cost hierarchy

levels common to a manufacturer?levels common to a manufacturer?

Discussion Discussion

A.A. 1. Unit level.1. Unit level.

2. Batch level.2. Batch level.

3. Product level.3. Product level.

4. Facility level.4. Facility level.


The New Manufacturing The New Manufacturing Environment and Environment and

JIT OperationsJIT Operations


Define the Define the just-in-time (JIT) just-in-time (JIT)

operating philosophyoperating philosophy and identify and identify

the elements of a JIT operating the elements of a JIT operating

environment.environment.


Traditional Traditional Operating EnvironmentOperating Environment

» In a traditional operating environment, In a traditional operating environment, a company usually:a company usually:1. Maintains large amounts of inventory.1. Maintains large amounts of inventory.

2. Uses push-through production methods.2. Uses push-through production methods.

3. Purchases materials in larger lot sizes 3. Purchases materials in larger lot sizes with fewer deliveries.with fewer deliveries.

4. Performs infrequent setups.4. Performs infrequent setups.

5. Manufactures products in batches.5. Manufactures products in batches.

6. Uses a work force skilled in only one 6. Uses a work force skilled in only one area.area.


The New EnvironmentThe New Environment» The new manufacturing environment The new manufacturing environment

emphasizes streamlined and emphasizes streamlined and improved manufacturing.improved manufacturing.

1. Waste in materials, labor, space, and 1. Waste in materials, labor, space, and

production time are reduced.production time are reduced.

2. Recordkeeping is reduced.2. Recordkeeping is reduced.

3. Resources that tie up working capital 3. Resources that tie up working capital

are reduced.are reduced.


JIT: Basic ConceptsJIT: Basic Concepts» Underlying the new methods are Underlying the new methods are

several basic concepts.several basic concepts.1.1. Simple is better.Simple is better.2.2. The quality of the product or service is The quality of the product or service is

critical.critical.3.3. The work environment must emphasize The work environment must emphasize

continuous improvement.continuous improvement.4.4. Any activity or function that does not add Any activity or function that does not add

value should be reduced.value should be reduced.5.5. Goods should be produced only when Goods should be produced only when

needed.needed.


JIT Operating EnvironmentJIT Operating Environment» The elements of a JIT operating The elements of a JIT operating

environment are:environment are:

1.1. Maintain minimum inventory levels.Maintain minimum inventory levels.

2.2. Develop pull-through production Develop pull-through production

planning and scheduling.planning and scheduling.

3.3. Purchase materials and produce as Purchase materials and produce as

needed, in smaller lot sizes.needed, in smaller lot sizes.

4.4. Perform quick, inexpensive machine Perform quick, inexpensive machine

setups. setups.


JIT Operating EnvironmentJIT Operating Environment

5.5. Create flexible manufacturing work cells.Create flexible manufacturing work cells.5.5. Create flexible manufacturing work cells.Create flexible manufacturing work cells.

6.6. Develop a multiskilled work force.Develop a multiskilled work force.

7.7. Maintain high levels of product quality.Maintain high levels of product quality.

8.8. Enforce a system of effective preventive Enforce a system of effective preventive

maintenance.maintenance.

9.9. Encourage continuous improvement for Encourage continuous improvement for

the work environment.the work environment.


Accounting for Accounting for Product Costs in the New Product Costs in the New

Manufacturing EnvironmentManufacturing Environment


Identify the changes in product Identify the changes in product costing that result when a firm costing that result when a firm adopts a JIT operating adopts a JIT operating environment.environment.


TraditionalTraditionalOperating EnvironmentOperating Environment

» The traditional operating environment The traditional operating environment divides the production into five parts:divides the production into five parts:

1.1. Processing time.Processing time.

2.2. Inspection time.Inspection time.

3. Moving time.3. Moving time.

4. Queue time.4. Queue time.

5. Storage time.5. Storage time.


JIT Operating EnvironmentJIT Operating Environment» In product costing under JIT, costs In product costing under JIT, costs

associated with processing time are associated with processing time are grouped as either materials costs or grouped as either materials costs or conversion costs.conversion costs.

» Conversion costs include the total of Conversion costs include the total of direct labor costs and manufacturing direct labor costs and manufacturing overhead costs incurred by a overhead costs incurred by a production department, JIT/FMS production department, JIT/FMS work cell, or other work center.work cell, or other work center.


Assigning CostsAssigning Costs

» In the JIT operating environment, In the JIT operating environment, indirect costs have little correlation indirect costs have little correlation with direct labor hours.with direct labor hours.

» Since automation has replaced Since automation has replaced direct labor hours with machine direct labor hours with machine hours, machine hours become more hours, machine hours become more important with JIT.important with JIT.


Indirect CostsIndirect Costs» Several costs that were treated as indirect Several costs that were treated as indirect

costs in a traditional production costs in a traditional production

environment are directly traceable to a JIT environment are directly traceable to a JIT

production cell.production cell.

» Only costs associated with building Only costs associated with building

occupancy, insurance, and property occupancy, insurance, and property

taxes remain indirect costs of work taxes remain indirect costs of work

cells.cells.


Throughput TimeThroughput Time

» The key measure in a JIT operating The key measure in a JIT operating

environment is throughput time.environment is throughput time.

» Throughput time is the time it takes Throughput time is the time it takes

to move a product through the entire to move a product through the entire

production process.production process.


Comparison of ABM and JITComparison of ABM and JIT


Compare ABM and JIT as Compare ABM and JIT as

activity-based systems.activity-based systems.


Similarities of ABM and JITSimilarities of ABM and JIT» ABM and JIT are similar in that both ABM and JIT are similar in that both

analyze processes and identify value-analyze processes and identify value-

adding and nonvalue-adding activities.adding and nonvalue-adding activities.

Both seek to eliminate or reduce Both seek to eliminate or reduce

nonvalue-adding activities.nonvalue-adding activities.

Both seek to improve the allocation of Both seek to improve the allocation of

resources.resources.


System DifferencesSystem Differences» The two systems differ in their primary The two systems differ in their primary

goals.goals.

The primary goal of ABM is to calculate The primary goal of ABM is to calculate

the most accurate product cost by using the most accurate product cost by using

activity-based costing (ABC).activity-based costing (ABC).

The primary goal of JIT is to simplify and The primary goal of JIT is to simplify and

standardize production and purchasing standardize production and purchasing



Comparison of ABM and JITComparison of ABM and JITApproaches to Activity-Based SystemsApproaches to Activity-Based Systems

ABMABM JIT JIT

Purpose Reduce or eliminate Reduce complexity using work nonvalue-adding cells, standardizing parts, and activities reducing or eliminating inventories

and nonvalue-adding production activities

Cost Use ABC to assign Reorganize service activities so assignment manufacturing over- that they are performed within

head costs to the work cells and manufacturing product cost by overhead costs incurred in the using appropriate work cell become direct costs of cost drivers the products made in the work cell

Costing Integrate ABC with Use backflush costing to calculatemethod either job order or product costs when the products

process costing to are completedcalculate product costs

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19-1 Copyright Houghton Mifflin Company. All rights reserved. Chapter 19 Activity-Based Systems: Activity-Based Management and Just-in-Time Belverd