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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
19-19-22Copyright Houghton Mifflin Company. All rights reserved.
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.
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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.
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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.
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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.
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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.
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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.
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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.
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Value-Adding and Value-Adding and Nonvalue-Adding Activities Nonvalue-Adding Activities and Process Value Analysisand Process Value Analysis
OBJECTIVE 3OBJECTIVE 3
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.
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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.
19-19-1111Copyright Houghton Mifflin Company. All rights reserved.
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.
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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.
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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.
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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
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ImplementingImplementingActivity-Based CostingActivity-Based Costing
OBJECTIVE 4OBJECTIVE 4
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.
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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.
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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.
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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.
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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.
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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.
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Cost HierarchyCost Hierarchy
» The cost hierarchy includes both The cost hierarchy includes both
value-adding and nonvalue-adding value-adding and nonvalue-adding
activities.activities.
» The frequency of activities varies The frequency of activities varies
across activity levels.across activity levels.
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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
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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.
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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.
19-19-2525Copyright Houghton Mifflin Company. All rights reserved.
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.
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The New Manufacturing The New Manufacturing Environment and Environment and
JIT OperationsJIT Operations
OBJECTIVE 5OBJECTIVE 5
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.
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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.
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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.
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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.
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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.
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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.
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Accounting for Accounting for Product Costs in the New Product Costs in the New
Manufacturing EnvironmentManufacturing Environment
OBJECTIVE 6OBJECTIVE 6
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.
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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.
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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.
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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.
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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.
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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.
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Comparison of ABM and JITComparison of ABM and JIT
OBJECTIVE 8OBJECTIVE 8
Compare ABM and JIT as Compare ABM and JIT as
activity-based systems.activity-based systems.
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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.
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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
activities.activities.
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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