Chapter 19
Activity-Based Systems:
Activity-Based Management
and Just-in-Time
Belverd E. Needles, Jr.
Marian Powers
Sherry K. Mills
Henry R. Anderson
----------Multimedia Slides by:
Dr. Paul J. Robertson
New Mexico State University
Steve Leask
New Mexico State University
19-1
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Activity-Based Management
and Activity-Based Costing
OBJECTIVE 2
Define activity-based management
(ABM) and discuss its relationship
with the supply chain and value
chain.
19-2
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Activity-Based Management
» Activity-based management (ABM) is
an approach to management that
includes:
 Identifying all major operating activities.
 Determining what resources are
consumed by each activity.
 Categorizing the activities as either
adding value to a product or service or
not adding value.
19-3
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Activity-Based Management
» ABM provides financial and
operational performance information
at the activity level that:
 Is helpful for making decisions about
business segments.
 Helps managers eliminate waste and
inefficiencies and redirect resources to
activities that add value to the product
or service.
19-4
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Supply Chains and
Value Chains
» Two tools of ABM, supply chains and
value chains, help managers better
understand their organization’s
external and internal operations.
19-5
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Supply Chain
» A supply chain is an interdependent
collection of organizations that
supplies materials, products, or
services to a customer.
 A supply chain includes suppliers and
suppliers’ suppliers as well as
customers and customers’ customers.
19-6
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Value Chain
» A value chain is a related sequence
of value-creating activities within an
organization.
 It helps managers better understand
the interdependencies of those
activities.
 A company’s value chain is part of its
supply chain.
19-7
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Value Chain
 When organizations work cooperatively
with others in their supply chain or
larger value chain, new processes can
be introduced or existing processes
redesigned to reduce the total cost of
products or services.
19-8
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Value-Adding and NonvalueAdding Activities and
Process Value Analysis
OBJECTIVE 3
Distinguish between value-adding
and nonvalue-adding activities,
and describe process value
analysis.
19-9
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Value-Adding Activities
» A value-adding activity is an activity
that adds value to a product or
service from the customer’s
perspective. Examples include:
 Assembling a car.
 Painting a car.
 Installing brakes on a car.
19-10
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Nonvalue-Adding Activities
» A nonvalue-adding activity is an
activity that adds cost to a product or
service but does not increase its
market value. Examples include:
 Moving materials.
 Storing materials.
19-11
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Process Value Analysis
» Process value analysis (PVA) is an
analytical method of identifying all
activities and relating them to events
that cause or drive the need for the
activities and the resources
consumed.
19-12
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Costs and Resources
» By identifying nonvalue-adding
activities, organizations can reduce
costs and redirect resources to
value-adding activities.
19-13
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Value-Adding Activities
for 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
names and addresses sorted in
the ZIP code order
Increases the probability that the client
will efficiently and effectively reach
targeted customer group
Verify the conformity of mailing
information with USPS
requirements
Ensures that the client’s mailing will
receive the best postal rate
Process the job
Creates the client mailing
Deliver the letters to the post office Begins the delivery process
19-14
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Implementing
Activity-Based Costing
OBJECTIVE 4
Define a cost hierarchy, describe its
elements, and explain how a cost
hierarchy and a bill of activities are
used in activity-based costing.
19-15
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Cost Hierarchy
» Many companies use a cost hierarchy
to manage the assignment of activitybased costs.
» A cost hierarchy for a manufacturer
typically has four levels:
 Unit level.
 Batch level.
 Product level.
 Facility level.
19-16
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Unit-Level Activities
» Unit-level activities are performed
each time a unit is produced:
 Insertion of a component during
assembly.
19-17
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Batch-Level Activities
» Batch-level activities are performed
each time a batch of goods is
produced:
 These activities vary with the number
of batches prepared.
 Examples: setup, scheduling, and
material handling.
19-18
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Product-Level Activities
» Product-level activities are performed
to support the diversity of products in
a manufacturing plant. Examples
include:
 Implementing engineering change
notices.
 Redesigning the installation process.
19-19
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Facility-Level Activities
» Facility-level activities are performed
to support a facility’s general
manufacturing process. Examples
include:
 Lighting the manufacturing plant.
 Securing the manufacturing plant.
 Insuring the manufacturing plant.
19-20
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Cost Hierarchy
» The frequency of activities varies
across activity levels.
» The cost hierarchy includes both
value-adding and nonvalue-adding
activities.
19-21
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Sample Activities in Cost Hierarchies
Activity Level
Car Manufacturer:
Engine Installation
Direct Mail Service:
Preparing Bank
Customer Mailing
Unit level
Install engine
Test engine
Print and fold letter
Insert letter and other
information into envelope
Seal and meter envelope
Batch level
Set up installation process
Move engines
Inspect engines
Retool machines
Verify correct postage
Bill client
Product or
service level
Redesign installation
process
Train employees
Develop and maintain
computer systems and
databases
Facility or
operations level
Provide facility management,
maintenance, lighting,
security, and space
Provide facility
management,
maintenance, lighting,
security, and space
19-22
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Bill of Activities
» A bill of activities is a list of activities
and related costs that is used to
compute the costs assigned to
activities and the product unit cost.
19-23
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Bill of Activities
» More complex bills of activities
include cost pool rates and cost
driver levels used to assign costs to
cost objects.
» A bill of activities may be used as the
primary document or a supporting
schedule to calculate the product unit
cost in job order or process costing.
19-24
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Discussion
Q. What are the four cost hierarchy
levels common to a manufacturer?
A. 1. Unit level.
2. Batch level.
3. Product level.
4. Facility level.
19-25
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The New Manufacturing
Environment and
JIT Operations
OBJECTIVE 5
Define the just-in-time (JIT)
operating philosophy and identify
the elements of a JIT operating
environment.
19-26
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Traditional
Operating Environment
» In a traditional operating environment,
a company usually:
1. Maintains large amounts of inventory.
2. Uses push-through production methods.
3. Purchases materials in larger lot sizes
with fewer deliveries.
4. Performs infrequent setups.
5. Manufactures products in batches.
6. Uses a work force skilled in only one
area.
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19-27
The New Environment
» The new manufacturing environment
emphasizes streamlined and
improved manufacturing.
1. Waste in materials, labor, space, and
production time are reduced.
2. Recordkeeping is reduced.
3. Resources that tie up working capital
are reduced.
19-28
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JIT: Basic Concepts
» Underlying the new methods are
several basic concepts.
1. Simple is better.
2. The quality of the product or service is
critical.
3. The work environment must emphasize
continuous improvement.
4. Any activity or function that does not add
value should be reduced.
5. Goods should be produced only when
needed.
19-29
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JIT Operating Environment
» The elements of a JIT operating
environment are:
1. Maintain minimum inventory levels.
2. Develop pull-through production
planning and scheduling.
3. Purchase materials and produce as
needed, in smaller lot sizes.
4. Perform quick, inexpensive machine
setups.
19-30
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JIT Operating Environment
5. Create flexible manufacturing work cells.
6. Develop a multiskilled work force.
7. Maintain high levels of product quality.
8. Enforce a system of effective preventive
maintenance.
9. Encourage continuous improvement for
the work environment.
19-31
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Accounting for
Product Costs in the New
Manufacturing Environment
OBJECTIVE 6
Identify the changes in product
costing that result when a firm
adopts a JIT operating
environment.
19-32
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Traditional
Operating Environment
» The traditional operating environment
divides the production into five parts:
1. Processing time.
2. Inspection time.
3. Moving time.
4. Queue time.
5. Storage time.
19-33
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JIT Operating Environment
» In product costing under JIT, costs
associated with processing time are
grouped as either materials costs or
conversion costs.
» Conversion costs include the total of
direct labor costs and manufacturing
overhead costs incurred by a
production department, JIT/FMS
work cell, or other work center.
19-34
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Assigning Costs
» In the JIT operating environment,
indirect costs have little correlation
with direct labor hours.
» Since automation has replaced
direct labor hours with machine
hours, machine hours become more
important with JIT.
19-35
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Indirect Costs
» Several costs that were treated as
indirect costs in a traditional
production environment are directly
traceable to a JIT production cell.
» Only costs associated with building
occupancy, insurance, and property
taxes remain indirect costs of work
cells.
19-36
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Throughput Time
» The key measure in a JIT operating
environment is throughput time.
» Throughput time is the time it takes
to move a product through the entire
production process.
19-37
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Comparison of ABM and JIT
OBJECTIVE 8
Compare ABM and JIT as
activity-based systems.
19-38
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Similarities of ABM and JIT
» ABM and JIT are similar in that both
analyze processes and identify valueadding and nonvalue-adding activities.
 Both seek to eliminate or reduce
nonvalue-adding activities.
 Both seek to improve the allocation of
resources.
19-39
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System Differences
» The two systems differ in their primary
goals.
 The primary goal of ABM is to calculate
the most accurate product cost by using
activity-based costing (ABC).
 The primary goal of JIT is to simplify and
standardize production and purchasing
activities.
19-40
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Comparison of ABM and JIT
Approaches to Activity-Based Systems
ABM
JIT
Purpose
Reduce or eliminate
nonvalue-adding
activities
Reduce complexity using work
cells, standardizing parts, and
reducing or eliminating inventories
and nonvalue-adding production
activities
Cost
assignment
Use ABC to assign
manufacturing overhead costs to the
product cost by
using appropriate
cost drivers
Reorganize service activities so
that they are performed within
work cells and manufacturing
overhead costs incurred in the
work cell become direct costs of
the products made in the work cell
Costing
method
Integrate ABC with
either job order or
process costing to
calculate product costs
Use backflush costing to calculate
product costs when the products
are completed
19-41
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