Activity-Based Management Chapter 5
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
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
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?
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
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
Steps in the ABM process • Activity analysis • Value-adding? • Customer’s viewpoint • Necessary evil • Non-value-adding • Cost
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
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
ABC/ABM implementation considerations • Management commitment • Scope of project • Determines resources needed • Resources • Personnel • Time • Technology
ABC/ABM implementation considerations • Organizational culture • Acceptance of change • Willingness to use the information • Open communication • Sharing ideas • Rumor control • Teamwork
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.
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