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Activity- and Activity- and Strategy-Based Strategy-Based Responsibility Responsibility

AccountingAccounting

CHAPTERCHAPTER

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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.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to: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 Elements of a Functional-Based Functional-Based

Responsibility Responsibility Accounting SystemAccounting System

Elements of a Elements of a Functional-Based Functional-Based

Responsibility Responsibility Accounting SystemAccounting System

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Responsibility Is Responsibility Is DefinedDefined

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 Performance Measures Are EstablishedAre Established

Performance Is Performance Is MeasuredMeasured

Individuals Are Individuals Are Rewarded Based on Rewarded Based on

Financial PerformanceFinancial 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 Elements of an Activity-Based Activity-Based Responsibility Responsibility

Accounting SystemAccounting System

Elements of an Elements of an Activity-Based Activity-Based Responsibility Responsibility

Accounting SystemAccounting System

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Responsibility Is Responsibility Is DefinedDefined

Team

Value Chain

Optimal

Process Oriented

Dynamic

Value-Added

Time Reductions

Cost Reductions

Quality ImprovementTrend Measures

Performance Measures Performance Measures Are EstablishedAre Established

Performance Is Performance Is MeasuredMeasured

Individuals Are Rewarded Individuals Are Rewarded Based on Multidimensional Based on Multidimensional

PerformancePerformanceGain-

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 Elements of a Strategy-Based Strategy-Based Responsibility Responsibility

Accounting SystemAccounting System

Elements of a Elements of a Strategy-Based Strategy-Based Responsibility Responsibility

Accounting SystemAccounting System

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Responsibility Is Responsibility Is DefinedDefined

Financial

Process

Communica-tion Strategy

Alignment of Objectives

Balanced MeasuresLink to Strategy

Financial Measures

Process Measures

Customer MeasuresInfrastructure Measures

Performance Measures Performance Measures Are EstablishedAre Established

Performance Is Performance Is MeasuredMeasured

Individuals Are Rewarded Individuals Are Rewarded Based on Multidimensional Based on Multidimensional

PerformancePerformanceGain-

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

ResourcesResources

Process Dimension

Driver Driver AnalysisAnalysis

Why?

Performance Performance AnalysisAnalysis

How well?

Products Products and and

CustomersCustomers

ActivitiesActivities

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 AnalysisProcess Value AnalysisProcess Value Analysis

Process value analysis is concerned with:

Driver analysis

Activity analysis

Activity performance measurement

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Activity AnalysisActivity AnalysisActivity 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-Value-Added Added

ActivitiesActivities

Value-Value-Added Added

ActivitiesActivities

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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-Value-Added Added

ActivitiesActivities

Value-Value-Added Added

ActivitiesActivities

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A discretionary activity is classified as value-added provided it simultaneously satisfies three conditions:

Value-Value-Added Added

ActivitiesActivities

Value-Value-Added Added

ActivitiesActivities

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.

NonvalueNonvalue-Added -Added

ActivitiesActivities

NonvalueNonvalue-Added -Added

ActivitiesActivities

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Nonvalue-Nonvalue-Added Added

ActivitiesActivities

Nonvalue-Nonvalue-Added Added

ActivitiesActivities

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- ActualValue-Added Nonvalue- Actual Activity Costs Added Costs CostsActivity 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 CostsNonvalue-Added Costs Activity 2003 2004 ChangeActivity 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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ActAct

Kaizen Cost Reduction ProcessKaizen Cost Reduction Process

DoDo DoDo

Kaizen Subcycle Maintenance Subcycle

CheckCheck

PlanPlanSearch

CheckCheck

ActAct

StandardStandardLock 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 Cycle

Cost %

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 CostTarget Cost

Target PriceTarget PriceMarket Share Market Share ObjectiveObjective

Product Product FunctionalityFunctionality

Target ProfitTarget Profit

Product and Product and Process DesignProcess Design

Target Target Cost Met?Cost Met?

NO

Produce ProfitProduce Profit

YES

Target-Costing Model

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Unit Cost and Price Information for New Product Unit Cost and Price Information for New Product

Unit production cost $ 6

Unit life-cycle cost 10

Unit whole-life cost 12

Budgeted unit selling price 15

Life-Cycle Costing: Budgeted Costs and Income

Life-Cycle Costing: Budgeted Costs and Income

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Budgeted CostsBudgeted Costs

Development costs $200,000 ---- ----$ 200,000

Production costs ---- $240,000 $360,000600,000

Logistic costs ---- 80,000 120,000 200,000

Annual 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 not

included in the budgeted income e statement.

ItemItem 20032003 20042004 2005 2005 Item TotalItem 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 Annual Cumulative Cumulative

YearYear RevenuesRevenues Costs Costs Income Income Income Income

Budgeted Product Income StatementsBudgeted Product Income Statements

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2003 Development $190,000 $200,000 $10,000F

2004 Production 300,000 240,000 60,000U

Logistics 75,000 80,000 5,000F

2005 Production 435,000 360,000 75,000U

Logistics 110,000 120,000 10,000F

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 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 StrategyVision and Strategy

FinanciFinancialal

InfrastructureInfrastructureCustomerCustomer ProcessProcess

ObjectivesObjectives

MeasuresMeasures

TargetsTargets

InitiativesInitiatives

Strategy-Translation

Process

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Testable Strategy Illustrated

Testable Strategy Illustrated

Quality Quality TrainingTraining

Infra-structure

Redesign Redesign ProductsProducts

ProcessReduce Reduce

Defective Defective UnitsUnits

Increase Increase Customer Customer

SatisfactionSatisfactionCustomer

Increase Increase Market Market ShareShare

Increase SalesIncrease SalesFinancial Increase ProfitsIncrease Profits

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Summary of Objectives and Measures:Financial Perspective

Objectives MeasuresObjectives 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 MeasuresObjectives 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 MeasuresObjectives 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 MeasuresObjectives 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 UnitActual 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 UnitTheoretical 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 MeasuresObjectives 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 MeasuresObjectives 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 MeasuresObjectives 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 MeasuresObjectives 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 EndThe EndThe End

Chapter TenChapter Ten

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