University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

485

Pages:

19
Author:

Teagan Allison

Chapter 7: Activity-Based Costing and Management Part 3 4 Process Value Analysis ►Process-value analysis is fundamental to activity-based management. ►Activity-based management is a system-wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and profit achieved by providing this value. ►Process value analysis focuses on cost reduction instead of cost assignment and emphasizes the maximization of system-wide performance. 4 Process Value Analysis Model Process-Value Analysis is concerned with: ►Driver analysis ►Activity analysis ►Performance measurement 4 Driver Analysis: The Search for Root Causes ►Managing activities requires an understanding of what causes activity costs. Every activity has inputs and outputs. ►Activity inputs are the resources consumed by the activity in producing its output. Activity output is the result or product of an activity. ►An activity output measure is the number of times the activity is performed. It is the quantifiable measure of the output. For example, the number of moves or distance moved are possible output measures for the material moving activity. ►Driver analysis is the effort expended to identify those factors that are the root causes of activity costs. 4 Activity Analysis: Identifying and Assessing Value Content ► The heart of process-value analysis is activity analysis. ► Activity analysis is the process of identifying, describing, and evaluating the activities that an organization performs. ► Activity analysis produces four outcomes: 1. 2. 3. 4. what activities are done how many people perform the activities the time and resources required to perform the activities an assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value. ► Activities can be classified as value-added or nonvalueadded. Value-Added Activities 4 ►Those activities necessary to remain in business are called value-added activities. ►Some activities are value-added by mandate. ►Activities required by the SEC and IRS ►The remaining activities in the firm are discretionary. ►A discretionary activity is classified as value-added provided it simultaneously satisfies all of the following conditions: 1. 2. 3. 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. 4 Nonvalue-Added Activities ►All activities other than those that are absolutely essential to remain in business, and therefore considered unnecessary, are referred to as nonvalueadded activities. ►A nonvalue-added activity can be identified by its failure to satisfy any one of the three previous defining conditions for adding value. ► For example, inspection is nonvalue-added because it is a state-detection activity, not a state-changing activity. 4 Nonvalue-Added Costs ►Costs that are caused either by nonvalue-added activities or the inefficient performance of valuedadded activities. ►For nonvalue-added activities, the nonvalue-added cost is the cost of the activity itself. ►For inefficient value-added activities, the activity cost must be broken into its value-added and nonvalue-added components. ►The value-added component is the waste-free component of the value-added activity and is, therefore, the value-added standard. Examples of Nonvalue-Added Activities ►In the manufacturing operation, the following major activities are often cited as wasteful and unnecessary: ►Scheduling: An activity that uses time and resources to determine when different products have access to processes ►Moving: An activity that uses time and resources to move raw materials, work in process, and finished goods from one department to another. ►Waiting: An activity in which raw materials or work in process use time and resources by waiting on the next process. ►Inspecting: An activity in which time and resources are spent ensuring that the product meets specifications. ►Storing: An activity that uses time and resources while a good or raw material is held in inventory. 4 Activity Management Reduces Costs in Four Ways * Activity elimination focuses on nonvalue-added activities. * Activity reduction decreases the time and resources required by an activity. * Activity selection involves choosing among different sets of activities that are caused by competing strategies. * Activity sharing increases the efficiency of necessary activities by using economies of scale. 4 Cornerstone 7-7 Assessing Nonvalue-Added Costs 4 Activity Performance Measurement ►Assessing how well activities (and processes) are performed is fundamental to management’s efforts to improve profitability. ►Activity performance measures exist in both financial and nonfinancial forms. ►Measures of activity performance center on three major dimensions: 1. 2. 3. Efficiency - the relationship of activity inputs to activity outputs. Time - time required to perform an activity. Quality - doing the activity right the first time it is performed. 4 Cycle Time and Velocity ►Cycle time and velocity are two operational measures of time-based performance. ►Cycle time measures it measures how long it takes to produce an output from start to finish. ►Time/Units produced ►In a manufacturing process, cycle time is the length of time that it takes to produce a unit of output from the time raw materials are received (starting point of the cycle) until the good is delivered to finished goods inventory (finishing point of the cycle). ►Velocity is the number of units of output that can be produced in a given period of time ►Units produced/Time ►Velocity is the reciprocal of cycle time. 4 Cornerstone 7-8 Calculating Cycle Time and Velocity 4 Quality Cost Management ►Activity-based management also is useful for understanding how quality costs can be managed. ►Quality costs can be substantial in size and a source of significant savings if managed effectively. ►Improving quality can produce significant improvements in profitability and overall efficiency. ►Quality improvement can increase profitability in two ways: ►by increasing customer demand and thus sales revenues ►by decreasing costs 4 Quality Related Activities ►Quality-linked activities are those activities performed because poor quality may or does exist. ►The costs of performing these activities are referred to as costs of quality. ►The definitions of quality-related activities imply four categories of quality costs: ►prevention costs ►appraisal costs ►internal failure costs ►external failure costs ►Thus, the costs of quality are associated with two subcategories of quality-related activities: control activities and failure activities. 4 Control Activities ►Control activities are performed by an organization to prevent or detect poor quality (because poor quality may exist). ►Control costs are the costs of performing control activities. ►Control activities are made up of prevention and appraisal activities. ►Prevention costs are incurred to prevent poor quality in the products or services being produced. ►Appraisal costs are incurred to determine whether products and services are conforming to their requirements or customer needs. 4 Failure Activities ►Failure activities are performed by an organization or its customers in response to poor quality (poor quality does exist). ►Failure costs are the costs incurred by an organization because failure activities are performed. ►Internal failure costs are incurred when products and services do not conform to specifications or customer needs before being shipped. ►External failure costs are incurred when products and services fail to conform to requirements or satisfy customer needs after being delivered to customers. 4 Environmental Cost Management ►For many organizations, management of environmental costs is becoming a matter of high priority and a significant competitive issue. ►Environmental costs are associated with the creation, detection, remediation, and prevention of environmental degradation. ►Environmental costs are classified into the same four categories as quality costs.