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Week 10: Creating Value I
Managing Activities
ACCT3012 ManagementAccounting B
Chang-Yuan Loh
Readings
Hilton 2007 Managerial Accounting: Creating Value in a Dynamic Business
Environment (Sixth Edition) Chapter 7: Activity-Based Management and Todays
Advanced Manufacturing Environment.
Milano 2000 Activity Based Management for Colleges and Universities.
Management Accounting Quarterly. Spring: pp. 2-6.
Armstrong 2002 The costs of activity-based management. Accounting,
Organizations and Society. Vol 27(1-2): pp. 99-120.
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Learning objectives
What is 'activity-based' analysis?
Revisiting ABC and the value chain
What is the purpose of ABM? p p
Understanding how it all fits
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Breaking down the concepts
Start small: the life(?) of the average Uni student
- What goes into the process of studying at Uni?
Then expand!
- Preparations in Masterchef, MKR, Iron Chef
- Imagine the complexity in managing your own restaurant?
Understanding that:
- Life is one big process comprised of activities
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Intro
Part I of the value creation 'trilogy' revisiting the idea of 'value'
Recall challenge to maximise profitability of different goods/services
Focusing on: g
- Measuring, managing costs of activities and continuous improvement
- Maximisingthroughput, removing bottlenecks
- Assessing and improving quality
Can these be done without a consideration of organisational processes?
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What gets measured gets attention
Activities represent the building blocks of an organisations competitive
advantage.
Remember: what you measure is what you get. If you dont measure it, you
dont improve it, and if no necessary steps are taken, it worsens.
Student study patterns measuring results and actions/activities needed to
get there:
- Readings
- Lecture
- Preparation
- Assessments
- Revision
- Asking questions
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ABC - where it begins
Traditional cost systems use a single overhead cost pool and single cost
driver to spread or average costs across products/services
This can lead to the cross-subsidisation problem where high volume
products are overcosted and low volume products are undercosted
(remember that ACCT2012 group assignment?) (remember that ACCT2012 group assignment?)
Consider: Serah, Luke, Vivianne and Aaron had dinner at a restaurant.
The bill amounted to $108. How to spilt?
- $108 / 4 =$27?
How about: a company manufactures four different products. Total
production costs amount to $200,000. Would we spilt similarly?
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Illustrating cross-subsidization
Entree Dessert Drinks Total
Serah $11 $0 $4 $15
Luke 20 8 14 42
Vivianne 15 4 8 27
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Vivianne 15 4 8 27
Aaron 14 4 6 24
Total $60 $16 $32 $108
Average $15 $4 $8 $27
What do these tell us?
The problem of averaging costs is that it may not depict an accurate
representation of activities performed and the resources consumed.
ABC aims to improve cost allocations by:
- Identifying activities performed
- Estimating cost of activities
- Calculate appropriate cost drivers
- Assign activity costs to products/services
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From ABC to ABM
A University Faculty wishes to measure the costs of providing three
business courses.
Total costs amounted to $8,000,000.
Costs are allocated based on student numbers which totalled 11,100.
Course Course Course Total
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Course
A
Course
B
Course
C
Total
Students 3100 6000 2000 11,100
Cost per
student
$720.72
Cost per
course
$2.23m $4.32m $1.44m $8m
Problems?
- Simplistic allocation of costs
- Ignores different products/services (courses) may perform different activities
- Ignores consumption of different activities by customers (students)
- Measures overall cost but makes management of costs and activities difficult
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The AB side
T&L activities Activity cost Course A Course B Course C
Develop new
courses
$200k 200k
Enrolment 300k 100k 100k 100k
Teaching 5000k 2000k 2000k 1000k
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Assessing 900k 400k 300k 200k
Counselling 1000k 100k 400k 500k
Graduating 600k 300k 200k 100k
Total $8m 3.1m (2.23m) 3m (4.32m) 1.9m (1.44m)
No. students 3,100 6,000 2,000
Cost per
student
$1,000 (720) 500 (720) 950 (720)
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Implications for the M side
What additional information resulted from the above ABC report?
- Identified key activities performed for each product/service (course)
- Broke down overall costs into specific costs from performing each activity
Benefits for management
- More accurate costing
- Better picture of how each course is run
- Stepping stone for more detailed reports
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It begins with ABC
But cost is one part of the picture
ABM takes it one step further by:
Identifying and managing the value not just the cost of activities y g g g j
People perform activities which consume resources the understanding of
activities allows us to:
- Manage costs, and analyse profitability of customers/product lines
- Identify and reduce constraints (W11)
- Improve quality (W12) all with the objective of...
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ABC/ABM
ABC
- Measuring product/service costs and thus pricing more accurately
- Assessing product/service profitability
- Answers the question What do things cost?
ABM
- Manages product/service costs
- Assessing what adds value, how processes can be improved
- Answers the question How to manage and improve activities?
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The MA as Business (Re)engineer
The MA helps identify and measure the performance of activities, financially
and non-financially:
QuickPark Inc is a parking lot management company in the United States.
After the introduction of a new credit card payment facility, customers began to
complain of long queues to exit parking lots during peak hours. Barbara
Turner asked her management accountant, Martina Daniels, to investigate the u e as ed e a age e t accou ta t, a t a a e s, to est gate t e
problem.
What did Daniels do?
- Made logistical changes to parking operations (e.g. removal of concrete barriers
enabling drivers to switch to faster-moving exit lanes)
- Implemented a new credit card terminal system that reduced authorisation and
transaction time by over 50%.
- Projected savings for QuickPark amounted to $500,000 annually.
(adapted from CMA, Burch, 1994)
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Its that Porter guy again...
An institution can outperform rivals only if it can establish a
difference that it can preserve. It must deliver greater value to
customers or create comparable value at a lower cost.
Ultimately, all differences between companies in cost or price
derive from the hundreds of activities required to create,
produce sell and deliver their products and services Cost is produce, sell, and deliver their products and services...Cost is
generated by performing activities, and cost advantage arises from
performing particular activities more efficiently than competitors.
Similarly, the differentiation arises from both the choice of activities
and how they are performed. Activities, then, are the basic units
of competitive advantage. Overall advantage or disadvantage
results from all of a institutions activities, not only a few.
Porter, M. (What is Strategy, Harvard Business Review, 1996)
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Sound familiar?
Remember the value chain, balanced scorecard?
Managing the non-financial information
e.g. Staring at the scoreboard during a soccer match g g g
e.g. Measuring lead time as a business activity:
- Production lead time as an indicator of future performance
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Revisiting W2: Identifying value
An activity adds value where:
A customer encourages more of that activity; and
The organisation is more likely to reach its objective by performing that g y j y p g
activity
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Importance of value
Customer-perceived value?
Value-added activities enhance the value of a product/service in the eyes of
the customer and/or are a necessary part of the organisation
Non-value-added activities do not
ABM strives to reduce or eliminate NVAs and improve efficiency of Vas
Managing activities requires both a financial and non-financial consideration; it
must add value for both the customer and the organisation. Are we capturing:
- Value-added activities but not efficient;
- Non value-added activities that are unnecessary and/or inefficient?
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Lecture Example
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http://www.youtube.com/watch?v=dnOeixfWLcs
LOTR: Return of the King behind the scenes a
summary
Pre-production Production Post-production
Principal Photography
Use of motion capture during principal photography how did it create p gp p p g p y
value?
- VAs?
- NVAs?
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Lecture Example
To achieve world class status, we must build and maintain long-term
relationships with vendors that offer the best overall value,Ridgeway, MA
at Evian Company.
Evian can purchase circuit boards from two vendors: $20 per board from
Nortec, or $80 per board from Bates. o tec, o $80 pe boa d o ates
Which is the best option, given the available information?
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Now, what if?
Assume Evian conducts a full activity-based analysis that assesses
vendors according to the incremental costs of non-value-added activities
Evian has to perform after purchasing each board.
NVA activities include inspection/testing of circuit boards due to poor
vendor quality, reworking of circuit boards, late deliveries and paperwork. e do qua ty, e o go c cut boa ds, ate de e es a d pape o
Nortecs NVA cost per board: $96.00
Bates NVA cost per board: $8.00
What is the true cost for Evian for purchasing circuit boards from (a)
Nortec, (b) Bates?
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Lecture Example
Have you seen these around?
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Lecture Example
Lets look at one part of the retailers daily process: price tagging
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Electronic tags as an alternative
http://www.youtube.com/watch?v=1QQEzGB2O-U
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How does electronic tagging create value?
First, consider the context
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Food for thought
Start small focus on the principles underlying activity-based analyses,
and how you can use them on everyday examples and then relate it to an
organisational context.
Doing so allows you to overcome fixations on grand concepts like ABC/M
and understand where AB(F, W, T etc) comes from. a du de sta d e e ( , , etc) co es o
Is it reasonable for project champions for ABM to 'face-off' against other
technologies like TQM, TOC? Are such 'methods' mutually exclusive? Why
or why not?
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Finit
Part Deux Next Week Managing Constraints
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