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
be able to:systems.
2. Explain process value analysis.
3. Describe activity performance measurement.
4. Discuss the basic features of the Balanced
Scorecard.
Responsibility
Accounting Model
The responsibility accounting model is
defined by four essential elements:
 Assigning responsibility
 Establishing performance
measures or benchmarks
 Evaluating performance
 Assigning rewards
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Types of Responsibility
Accounting
Management accounting offers the
following three types of responsibility
accounting systems.
 Functional-based
 Activity-based
 Strategic-based
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FunctionalBased 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.
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Elements of a
Functional-Based
Responsibility
Accounting System
Individual
in Charge
Operating
Efficiency
Unit
Budgets
Static
Standards
Financial
Efficiency
Actual vs.
Standard
Promotions
Profit
Sharing
Responsibility Is
Defined
Performance Measures
Are Established
Performance Is
Measured
Individuals Are
Rewarded Based on
Financial Performance
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Organizational
Unit
Financial
Outcomes
Standard
Costing
Currently
Attainable Stds.
Controllable
Costs
Financial
Measures
Bonuses
Salary
Increases
ActivityBased 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.
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Elements of an
Activity-Based
Responsibility
Accounting System
Team
Value Chain
Responsibility Is
Defined
Optimal
Process
Oriented
Time
Reductions
Cost
Reductions
Promotions
GainSharing
Performance Measures
Are Established
Performance Is
Measured
Individuals Are Rewarded
Based on Multidimensional
Performance
Process
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Financial
Dynamic
ValueAdded
Quality
Improvement
Trend
Measures
Bonuses
Salary
Increases
StrategyBased 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
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Elements of a
Strategy-Based
Responsibility
Accounting System
Financial
Process
Communication Strategy
Alignment of
Objectives
Financial
Measures
Process
Measures
Promotions
GainSharing
Responsibility Is
Defined
Performance Measures
Are Established
Performance Is
Measured
Individuals Are Rewarded
Based on Multidimensional
Performance
Customer
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Infrastructure
Balanced
Measures
Link to
Strategy
Customer
Measures
Infrastructure
Measures
Bonuses
Salary
Increases
Activity-Based Management
(ABM)
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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.
Activity-Based Management Model
Cost Dimension
Resources
Process Dimension
Driver
Analysis
Activities
Performance
Analysis
Why?
What?
How well?
Products
and
Customers
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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
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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.
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Those activities necessary to
remain in business are called
value-added activities.
ValueAdded
Activities
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Activities needed to comply
with the reporting
requirements, such as the
SEC, are value-added by a
mandate.
ValueAdded
Activities
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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.
ValueAdded
Activities
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All activities other than those
essential to remain in business
are referred to as nonvalueadded activities.
Nonvalue
-Added
Activities
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 Scheduling
NonvalueAdded
Activities
 Moving
 Waiting
 Inspecting
 Storing
Activity Analysis
Activity Analysis Can Reduce Costs in Four Ways:
Activity elimination
Activity selection
Activity reduction
Activity sharing
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Measures of Activity
Performance
 Efficiency
 Quality
 Time
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Measures of Activity Performance
Financial measures of activity
efficiency include:
• Value and nonvalueadded activity cost
reports
• Trends in activity cost
reports
• Kaizen standard setting
• Benchmarking
• Life-cycle costing
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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
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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
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
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Value- and NonvalueAdded Cost Report
Activity
Value-Added NonvalueCosts
Added Costs
Actual
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
$400,000
$430,000
$830,000
Total
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Trend Report: Nonvalue-Added Costs
Activity
Welding
Nonvalue-Added Costs
2003
2004
Change
-$80,000
$ 50,000
$ 30,000
Rework
90,000
70,000
20,000
Setups
360,000
200,000
160,000
60,000
35,000
25,000
$430,000
$355,000
$235,000
Inspection
Total
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.
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Kaizen Cost Reduction Process
Check
Do
Check
Act
Do
Act
Search
Plan
Kaizen Subcycle
Lock in
Standard
Maintenance
Subcycle
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Benchmarking uses best
practices as the standard for
evaluating activity
performance.
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Activity Capacity Management
Activity capacity is
the number of times
an activity can be
performed.
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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
$2,000 x 0
$0
SP x AQ
SP x AU
$2,000 x 60
$2000 x 40
$120,000
$80,000
Activity
Unused
Volume Variance
Capacity Variance
$120,000 U
$40,000 F
Life-Cycle Cost Commitment Curve
Life Cycle
Cost %
100
90
80
Cost Commitment
Curve
70
90 percent of lifecycle costs are
committed at this
point
60
50
40
30
20
10
Planning
Design
Testing
Production
Logistics
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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
Market Share
Objective
Target Price
Target Profit
TargetCosting
Model
Target Cost
Product and
Process Design
NO
Target
Cost Met?
YES
Produce Profit
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Product
Functionality
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Life-Cycle Costing: Budgeted
Costs and Income
Unit Cost and Price Information for New Product
Unit production cost
Unit life-cycle cost
Unit whole-life cost
Budgeted unit selling price
$ 6
10
12
15
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Budgeted Costs
Item
Development costs
Production costs
Logistic costs
Annual subtotal
Postpurchase costs
Annual total
Units produced
2003
$200,000
------$200,000
--$200,000
2004
---$240,000
80,000
$320,000
80,000
$400,000
2005
---$360,000
120,000
$480,000
120,000
$600,000
40,000
60,000
Item Total
$ 200,000
600,000
200,000
$1,000,000
200,000
$1,200,000
Note: The post purchase costs are costs incurred by the customer and are not
included in the budgeted income e statement.
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Budgeted Product Income Statements
Year
Revenues
2003
2004
2005
---$600,000
900,000
Costs
-$200,000
-320,000
-480,000
Annual
Income
-$200,000
280,000
420,000
Cumulative
Income
-$200,000
80,000
500,000
Performance Report for
Life-Cycle Costs
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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.
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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
Scorecard
 The internal business
process perspective
 The learning and growth
perspective
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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.”
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Vision and Strategy
Financial
Customer
Process
Infrastructure
Objectives
Measures
Targets
Initiatives
StrategyTranslation
Process
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Financial
Increase Sales
Increase Profits
Customer
Increase
Market
Share
Increase
Customer
Satisfaction
Process
Redesign
Products
Reduce
Defective
Units
Infrastructure
Quality
Training
Testable Strategy
Illustrated
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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
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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
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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
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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
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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
Theoretical conversion
costs
= 60 minutes/12 units
= 5 minutes per unit
= $4 x 5
= $20 per unit
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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)
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Objectives
Operations:
Increase product quality
Increase process efficiency
Decrease process time
Postsales Service:
Increase service quality
Increase service efficiency
Decrease service time
Measures
Quality costs
Output yields
Percentage of defective units
Unit cost trends
Output/input(s)
Cycle time and velocity
MCE
First-pass yields
Cost trends
Output/input(s)
Cycle time
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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)
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Objectives
Increase motivation and
alignment
Increase information systems
capabilities
Measures
Suggestions per employee
Suggestions implemented per
employee
Percentage of processes with
real-time feedback
capabilities
Percentage of customer-facing
employees with on-line
access to customer and
product information
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Chapter Ten
The End
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