EMBA 802 1

• Nothing in the world can take the place of PERSISTENCE.

• Talent will not; nothing is more common than unsuccessful men with talent.

• Genius will not; unrewarded it's almost a proverb.• Education will not; the world is filled with educated

derelicts.• PERSISTENCE and DETERMINATION alone are

omnipotent.

_Calvin Coolidge

Today’s Quote

EMBA 802 2

Agenda Today

• Refine some points from last Wednesday• Review examples of the results of your

homework assignment• Make some observations• Clarify our views of the activity paradigm• Discuss efficiency & effectiveness• Talk about standard costs of activities

EMBA 802 3

Your Activity Examples

EMBA 802 4

Point of the Exercise

• Defining activities can be difficult, particularly in service and creative work.

• Even when we can define an activity, it can be difficult to separate measures of activity level from measures of output. It is simpler to focus on outputs, which is what the text tends to do in places.

• But defining the activities right is crucial

5 EMBA 802

OutputsInputs

Basic Activity View

EMBA 802 6

Activities

• Activities are about actions, effort, work done, not the consequences of the work or effort.

• Metrics or measures are the ways we are going to quantify the volume of activity during a time period. Different activities require different metrics.

EMBA 802 7

Activity Terminology

• Statistics represent the numeric values assigned to the metrics for a period.

• Data sources are the primary or secondary sources of the statistics.

EMBA 802 8

Thinking About Activities

Inputs Activities Outputs

Labor Making Products

Material Processing Intermediate

Parts Moving products

Facilities Operating Services

Services Providing Internal Holding services

EMBA 802 9

Example

• A shipping company had trouble determining how much it should cost to ship from Ohio to a point near the Atlantic ocean. In spite of numerous trips within the Great Lakes area, the company still found it difficult to predict costs. What do you suppose was making cost estimation difficult?

EMBA 802 10

Related Terminology

• What does it mean to be efficient?

• What does it mean to be effective?

EMBA 802 11

Efficiency

• Efficiency is a general concept that relates to entities ranging from individuals performing a single task to entire economies.

• Measures of efficiency nearly always compare the inputs to an activity or process with its outputs. The greater the output per unit of input, the more efficient. The fewer the units of input required to make one unit of output, the greater the efficiency.

EMBA 802 12

Efficiency

• Since the productivity of labor has been so key to the wealth of a society, we continue to focus on the productivity of people. Sales per person, gross margin per person, and physical output per person, are measures of efficiency as well as measures of productivity.

• Cost per sales dollar, or cost per unit of output are the most common measures of efficiency used in managerial accounting.

EMBA 802 13

Efficiency in Accounting

• In accounting we use cost standards, flexible budgets and profitability measures to evaluate efficiency. These standards relate the work done to the cost incurred to achieve that work. Physical measures are useful, but the ultimate measures include profitability.

• We may measure other operating variables because we believe they relate to profitability in the longer run.

14 EMBA 802

Just in time

Basic Activity View

Outputs

INPUTS

Input/Output

EMBA 802 15

Input/Output Relationships

INPUTS OUTPUTS

Yield or Productivity

Efficiency

16 EMBA 802

Basic Activity View

Outputs

INPUTS

Input/Output

Utilization

Rates

Productivity

EMBA 802 17

Effectiveness

• Effectiveness is concerned with the achievement of objectives. Making a sales goal, achieving a target market share, completing a project on schedule, satisfying customers, and retaining employees--which may or may not change productivity. So effectiveness is a separate issue:

Did we achieve the goal?

EMBA 802 18

Effectiveness Measures

• Percent of the goal achieved.

• Percent variance from goal.

• Improvement from past experience

• Percent of the goal achieved compared with last period.

• Percent variance from goal compared with last period.

• Examples from your experience?

EMBA 802 19

Effectiveness Measures

• Headcount, cycle time, customer satisfaction, and other measures are believed to lead to greater profitability. But they are not measures of efficiency per se.

EMBA 802 20

Operational (Technical) Control

Provides feedback to employees and their managers about the efficiency of activities being performed. Measures of effectiveness might include cycle times, spoilage rates, lost units, late shipments, etc.

EMBA 802 21

• Break for it!

22 EMBA 802

Number Output Per Unit Outputof Total Per Average Incremental Gain* Total Average Total***

Workers Output Person Total Cost cost (g) (h) (I) Incremental** 2 supers(a) (b) (c) = (b)/(a) (d) (e) = (d)/(c) (f) (c) - 5000(a) (d) - (g) (h)/(b) (j) (k)5 27,500 5,500 10,000 0.3636 0 2,500 7,500 0.2727 - 6 32,400 5,400 10,000 0.3086 0 2,400 7,600 0.2346 0.0204 7 37,100 5,300 10,000 0.2695 0 2,100 7,900 0.2129 0.0638 8 41,600 5,200 10,000 0.2404 0 1,600 8,400 0.2019 0.1111 9 45,900 5,100 10,000 0.2179 0 900 9,100 0.1983 0.1628

10 50,000 5,000 10,000 0.2000 0 - 10,000 0.2000 0.2195 15,000 11 53,900 4,900 10,000 0.1855 0 (1,100) 11,100 0.2059 0.2821 15,100 12 57,600 4,800 10,000 0.1736 0 (2,400) 12,400 0.2153 0.3514 15,200 13 61,100 4,700 10,000 0.1637 0 (3,900) 13,900 0.2275 0.4286 15,500 14 64,400 4,600 10,000 0.1553 0 (5,600) 15,600 0.2422 0.5152 15,800 15 67,500 4,500 10,000 0.1481 0 (7,500) 17,500 0.2593 0.6129 16,300 16 70,400 4,400 10,000 0.1420 0 (9,600) 19,600 0.2784 0.7241 16,800

609,400 59,400

*Calculated from a norm of 5,000 units per person with a force of 10 and valued at $1/unit.**Change from preceding line in column (h) divided by change from preceding line in column (b).***Sum of two column (h) amounts for the number of people totaling number on this line.

Source: George J. Staubus, Activity Costing and Input-Ouput Accounting, New York: Richard D. Irwin, Inc., 1971, page 78.

Hypothetical Company Supervision Cost and Outputfor any Time Period