10 -1

CHAPTER
Activity- and
Strategy-Based
Responsibility
Accounting
 10 -2

Objectives
1. Compare andAfter
contrast functional-based,
studying this
activity-based, and strategic-based
chapter, you should
responsibility accounting systems.
be able to:
2. Explain process value analysis.
3. Describe activity performance measurement.
4. Discuss the basic features of the Balanced
Scorecard.
 10 -3
Responsibility
Accounting Model
The responsibility accounting model is
defined by four essential elements:
 Assigning responsibility
 Establishing performance
measures or benchmarks
 Evaluating performance
 Assigning rewards
 10 -4
Types of Responsibility
Accounting
Management accounting offers the
following three types of responsibility
accounting systems.
 Functional-based
 Activity-based
 Strategic-based
 10 -5

Functional-
Based Responsibility
Accounting System
A functional-based responsibility accounting system
assigns responsibility to organizational units and
expresses performance measures in financial terms.
It is the responsibility accounting system that
was developed when most firms were
operating in relatively stable environments.
 10 -6

Elements of a
Functional-Based
Responsibility
Accounting System
 Individual 10 -7
Organizational
in Charge Responsibility Is Unit
Operating Defined Financial
Efficiency Outcomes
Unit Standard
Budgets Performance Measures Costing
Static Are Established Currently
Standards Attainable Stds.
Financial Controllable
Efficiency Performance Is Costs
Actual vs. Measured Financial
Standard Measures

Promotions Individuals Are Bonuses

Profit Rewarded Based on

Salary
Sharing Financial Performance Increases
 10 -8
Activity-
Based Responsibility
Accounting System
An activity-based responsibility accounting system
assigns responsibility to processes and uses both
financial and nonfinancial measures of performance.
It is the responsibility accounting system
developed for those firms operating in
continuous improvement environments.
 10 -9

Elements of an
Activity-Based
Responsibility
Accounting System
 10 -10
Team Process
Responsibility Is
Value Defined Financial
Chain
Optimal Dynamic
Performance Measures
Process Are Established Value-
Oriented Added
Time Quality
Reductions Performance Is Improvement
Cost Measured Trend
Reductions Measures

Promotions Individuals Are Rewarded Bonuses

Based on Multidimensional
Gain- Salary
Performance
Sharing Increases
 10 -11
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
 10 -12

Elements of a
Strategy-Based
Responsibility
Accounting System
 10 -13
Financial Customer
Responsibility Is
Process Defined Infrastructure
Communica-
tion Strategy Balanced
Performance Measures Measures
Alignment of Are Established Link to
Objectives
Strategy
Financial Customer
Measures Performance Is Measures
Process Measured Infrastructure
Measures Measures

Promotions Individuals Are Rewarded Bonuses

Based on Multidimensional
Gain- Salary
Performance
Sharing Increases
 10 -14
Activity-Based Management
(ABM)

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 encompasses both
product costing and process value analysis.
The activity-based management model has two
dimension: a cost dimension and a process
dimension.
 10 -15
Activity-Based Management Model
Cost Dimension

Resources

Process Dimension

Driver Performance
Activities
Analysis Analysis

Why? What? How well?

Products
and
Customers
 10 -16

Process Value Analysis

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 analysis is concerned with:
Driver analysis
Activity analysis
Activity performance measurement
 10 -17

Activity 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.
 10 -18

Those activities necessary to

remain in business are called
value-added activities.

Value-
Added
Activities
 10 -19

Activities needed to comply

with the reporting
requirements, such as the
SEC, are value-added by a
mandate.

Value-
Added
Activities
 10 -20

A discretionary activity is classified as value-added

provided it simultaneously satisfies three conditions:
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.
Value-
Added
Activities
 10 -21

All activities other than those

essential to remain in business
are referred to as nonvalue-
added activities.

Nonvalue
-Added
Activities
 10 -22

 Scheduling

Nonvalue-  Moving
Added  Waiting
Activities
 Inspecting
 Storing
 10 -23
Activity Analysis
Activity Analysis Can Reduce Costs in Four Ways:

Activity elimination
Activity selection
Activity reduction
Activity sharing
 10 -24

Measures of Activity
Performance

 Efficiency

 Quality

 Time
 10 -25
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
 10 -26

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
 10 -27

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
 Formulas 10 -28

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
 10 -29
Value- and Nonvalue-
Added Cost Report
Value-Added Nonvalue- Actual
Activity Costs Added Costs Costs
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
 10 -30

Trend Report: Nonvalue-Added Costs

Nonvalue-Added Costs
Activity 2003 2004 Change
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
 10 -31
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.
 10 -32

Kaizen Cost Reduction Process

Check Check

Do Act Do Act

Search
Plan Lock in
Standard

Kaizen Subcycle Maintenance

Subcycle
 10 -33

Benchmarking uses best

practices as the standard for
evaluating activity
performance.
 10 -34

Activity Capacity Management

Activity capacity is
the number of times
an activity can be
performed.
 10 -35

Activity Capacity Variance

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 SP x AQ SP x AU
$2,000 x 0 $2,000 x 60 $2000 x 40
$0 $120,000 $80,000
Activity Unused
Volume Variance Capacity Variance
$120,000 U $40,000 F
 10 -36
Life-Cycle Cost Commitment Curve

Life Cycle
Cost %

100
90 Cost Commitment
80 Curve
70
60 90 percent of life-
50 cycle costs are
40 committed at this
30 point
20
10

Planning Design Testing Production Logistics

 10 -37

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
 10 -38
Market Share Target Price Product
Objective Functionality
Target Profit
Target-
Costing Target Cost
Model
Product and
Process Design

NO Target
Cost Met?
YES
Produce Profit
 10 -39

Life-Cycle Costing: Budgeted

Costs and Income
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
 10 -40

Budgeted Costs
Item 2003 2004 2005 Item Total
Development costs $200,000 ---- ---- $ 200,000
Production costs ---- $240,000 $360,000 600,000
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.
 10 -41

Budgeted Product Income Statements

Annual Cumulative
Year Revenues Costs Income Income
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
 Performance Report for 10 -42

Life-Cycle Costs
Year Item Actual Costs Budgeted Costs Variance
2003 Development $190,000 $200,000 $10,000 F
2004 Production 300,000 240,000 60,000 U
Logistics 75,000 80,000 5,000 F
2005 Production 435,000 360,000 75,000 U
Logistics 110,000 120,000 10,000 F
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.
 10 -43

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
Balanced  The internal business
Scorecard
process perspective
 The learning and growth
perspective
 10 -44

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.”
 10 -45
Vision and Strategy

Financial Customer Process Infrastructure

Objectives

Strategy-
Measures
Translation
Process
Targets

Initiatives
 10 -46

Financial Increase Sales Increase Profits

Increase Increase
Customer Market Customer
Share Satisfaction

Reduce
Process Redesign Defective
Products Units

Infra- Quality Testable Strategy

structure Training Illustrated
 10 -47

Summary of Objectives and Measures:

Financial Perspective
Objectives
Revenue Growth:
Increase the number of new
products
Create new applications
Develop new customers and
markets
Adopt a new pricing strategy
Measures
Percentage of revenue
from new products
Percentage of repeat
customers
Percentage of revenue from
new sources
Product and customer
profitability
 10 -48

Objectives Measures
Cost 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
 10 -49

Summary of Objectives and Measures:

Customer Perspective
Objectives
Core:
Increase market share
Increase customer retention
Increase customer acquisition
Increase customer satisfaction
Increase customer profitability
Measures
Market share (percentage of
market)
Percentage of repeat
customers
Number of new customers
Ratings from customer
surveys
Customer profitability
 10 -50

Objectives
Performance Value:
Decrease price
Decrease postpurchase costs
Improve product functionality
Improve product quality
Increase delivery reliability
Improve product image and
reputation
Measures
Price
Postpurchase costs
Ratings from customer
surveys
Percentage of returns
On-time delivery percentage
Aging schedule
Ratings from customer
surveys
 10 -51

Actual 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 Unit
Theoretical cycle time = 60 minutes/12 units
= 5 minutes per unit
Theoretical conversion
costs = $4 x 5
= $20 per unit
 10 -52

Summary of Objectives and Measures:

Process Perspective
Objectives
Innovation:
Increase the number of new
products
Increase proprietary products
Decrease new product
development time
Measures
Number of new products vs.
planned
Percentage of revenue from
proprietary products
Time to market (from start
to finish)
 10 -53

Objectives Measures
Operations:
Increase product quality Quality costs
Output yields
Percentage of defective units
Increase process efficiency Unit cost trends
Output/input(s)
Decrease process time Cycle time and velocity
MCE
Postsales Service:
Increase service quality First-pass yields
Increase service efficiency Cost trends
Output/input(s)
Decrease service time Cycle time
 10 -54

Summary of Objectives and Measures:

Learning and Growth Perspective
Objectives
Increase employee capabilities
Measures
Employee satisfaction ratings
Employee turnover percentage
Employee productivity
(revenue/employee)
Hours of training
Strategic job coverage ratio
(percentage of critical job
requirements filled)
 10 -55

Objectives Measures
Increase motivation and Suggestions per employee
alignment Suggestions implemented per
employee
Increase information systems Percentage of processes with
capabilities real-time feedback
capabilities
Percentage of customer-facing
employees with on-line
access to customer and
product information
 10 -56

Chapter Ten

The End
10 -57