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?
Value-added vs. non-value-added
activities
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
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