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Activity-Based Management

Chapter 5 of Activity-Based Management explores Activity-Based Costing (ABC) and its role in identifying and analyzing costs associated with activities. While ABC does not create or reduce costs, it effectively determines the cost of performing activities, paving the way for process improvement. This chapter evaluates value-add versus non-value-add activities through customer perspectives, guiding organizations on enhancing value-added processes while reducing inefficiencies. It provides a structured approach with steps for analysis, identifying root causes, implementing changes, and evaluating results.

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Activity-Based Management

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Presentation Transcript

  1. Activity-Based Management Chapter 5

  2. Activity-based costing • Allocation process • Does not reduce or create costs • Does determine the cost to perform activities • Forms the basis for process improvement • Activity-based management

  3. Activity-based management • Evaluates the cost and value of activities to identify opportunities for improvement • High or low value to the customer? • Enhance value-added activities • Reduce non-value-added activities

  4. Value- vs. non-value-added • Would the customer willingly pay for the cost of the activity? • Would the customer encourage doing more of the activity? • Does the activity help the organization reach its goals?

  5. Activity Material handling Set-up Assembly Testing and inspection Rework Packaging Breaks and meetings Value-added? No No Yes Maybe No Maybe No Value-added vs. non-value-added activities

  6. Value-added vs. non-value-added activities • Determination is often subjective • Some are obvious • Others may be necessary, but do not add value to the customer • Use rating scale to categorize • Too much or too little detail can hurt • Should use a team-based approach • Must consider interactions

  7. Steps in the ABM process • Activity analysis • Value-adding? • Customer’s viewpoint • Necessary evil • Non-value-adding • Cost

  8. Steps in the ABM process • Identify opportunities for improvement • Low value-adding • Willie Sutton rule • Identify the root cause of the problem • “The 5 why’s” • Fix the problem, not treat the symptoms

  9. Steps in the ABM process • Estimate cost and cost savings • What will the changes cost? • How much will they save? • Make the changes • Evaluate results • Are expected results achieved? • Repeat the process

  10. ABC/ABM implementation considerations • Management commitment • Scope of project • Determines resources needed • Resources • Personnel • Time • Technology

  11. ABC/ABM implementation considerations • Organizational culture • Acceptance of change • Willingness to use the information • Open communication • Sharing ideas • Rumor control • Teamwork

  12. Cost of unused capacity • CAM-I capacity model • Productive capacity • Output of saleable product • Non-productive capacity • Capacity lost to non-productive activities • Set-ups, maintenance, defects, delays, etc. • Idle capacity • Unused capacity • Weekends, vacations, lack of orders, etc.

  13. Cost of unused capacity • Identifying cost of unused capacity • Resources supplied – resources used • Identifies opportunities for improvement • Reduce capacity • Increase output without incurring more of the cost • Some unused capacity is inevitable and good

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