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    Hilton Maher Selto

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    Activity-Based Management

    McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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    Activity-Based Management

    (ABM)

    Evaluates the

    costs and values

    of process

    activities . . .

    . . . To identify

    opportunities to

    improve

    efficiency.

    Activity-Based

    Costing

    Valued-Added

    Analysis

    Process

    Improvements,

    Customer Value, &

    Reduced Costs

    =+

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    ?ABM adds:

    Identification of value-addedand non-value-added

    activities

    Activity-Based Management

    4 Basic Steps Identify & classify the

    activities related to the

    companys products orservices.

    Estimate the costs

    associated with each

    activity.

    Calculate a cost-driver ratefor each activity.

    Assign activity costs to

    products using the cost-

    driver rate.

    Identifies the customerperceived value of each

    activity

    Identifies opportunities to

    enhance value-addedactivities and reduce or

    eliminate non-value-addedactivities

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    1. Identify and measure the different levels of resource spending

    2. Measure the costs of individual activities

    3. Identify cost-driver bases and measure activity

    cost-driver rates

    4. Use cost-driver rates to assign activity costs to

    products, jobs, services, and projects by multiplying theuse of cost driver base(s) by the cost driver rates

    5. Analyze the profitability of products using

    ABC unit-level and full costing.

    The Steps Of ABC

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    Activities

    Create outcomesand consume resources

    VALUE-ADDED ACTIVITIESenhance the value of products

    and services in the eyes ofthe customer while meetingthe goals of the organization

    NON-VALUE-ADDEDACTIVITIES

    do not contribute to customerperceived value

    The Importance Of Customer

    Value

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    Why do organizations have incentivesto eliminate non-value added activities?

    Competitors areconstantly striving

    to create more valuefor customers at

    lower cost

    The organization canapply the freed- upresources to value-

    added activities ordistribute them to the

    employees of theorganization.

    Competition canappear quickly

    Non-value Added Activities

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    Most Likely Sources of Non-

    Value-Added Activities

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    If the answeris yes to

    both it isvalue-added.

    If the answeris no to

    both or eitherit is non-

    value-added.

    YES YESNO NO

    The test for valueadded activities

    Identifying Value-Added

    Activities

    Would an externalcustomer encourage

    the organization to domore of the activity?

    Would the organizationbe more likely toreach its goal by

    performing that activity?

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    VALUE-ADDED

    NON-VALUE-

    ADDED

    Rate on a scale of 1 to 5

    Necessary Activities

    Technological

    Requirements

    Policy

    Requirements

    Regulatory

    Requirements

    5 4 3 2 1

    Neither value-added nor non-value-added

    How Should An Organization

    Measure Value-Added?

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    Everyones knowledge is limited

    Everyone is potentially biased in

    his or her response

    Use a team

    approach

    Who Should Perform The

    Measurement Activity?

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    Twin objectives

    of

    ABM

    Identify non-value-added

    activities to be eliminatedor reduced

    Identify value-added

    activities to be enhanced

    Redesign processes to eliminate wasteful spending on

    non-value-added activities

    Tasks Required by Activity-

    Based Management

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    5-13

    5 (highest) $100 3.3%

    4 0 0.0%

    3 1,200 40.0%

    2 700 23.3%1 (lowest) 1,000 33.3%

    Total $3,000 100.0%

    By comparing the cost to the value of the task, we can identifyoversupplied non-value-added activities and undersupplied value-added activities. By focusing on those low-value tasks with high

    resource allocation, we can improve efficiency.

    Oversupplied

    non-value-added

    activities

    Sorting Activities By Cost

    And Value

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    Sub-Activity

    Trim excess

    plastic 83 min.

    Recycle

    trimmings 60 min.Put piece in

    box 25 min.

    Log out

    completed

    order 30 min.

    Move order towarehouse 60 min.

    Register order

    in inventory 28 min.

    Total elapsed

    time 286 min.

    Elapsed Time:

    Before Process

    Improvements

    Ask Why? for each

    step in the process.

    Why#1: Appearance and product functionrequires removal of the excess

    Why#2: Under high-injection pressure, plastic

    leaks from the edges of the mold

    Why#3: High pressure is required to mold the

    products properly

    Why#4: The design of the molds permitsleakage

    Why#5: The molds are based on old designs

    Why do employees need to trimexcess plastic from molded

    products?

    SOLUTION: Rework or replace oldmolds with improved molds to eliminate

    the need for trimming and recycling.

    Identifying Opportunities For

    Process Improvement

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    Sub-Activity

    Trim excess

    plastic 83 min.

    Recycle

    trimmings 60 min.Put piece in

    box 25 min.

    Log out

    completed

    order 30 min.

    Move order towarehouse 60 min.

    Register order

    in inventory 28 min.

    Total elapsed

    time 286 min.

    Elapsed Time:

    Before Process

    Improvements

    Why are we spending so much time on

    non-value-added record keeping and

    the correction of recording errors?

    SOLUTION: Install a bar-coding

    system to mark and track all

    orders electronically

    A bar-coding system creates a

    unique bar code for each order

    and allows the company to mark

    and track all orders electronically

    Ask Why? for each

    step in the process.

    Identifying Opportunities For

    Process Improvement

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    After process

    improvements,

    total elapsed

    time has been

    reduced to82.2 minutes.

    Sub-Activity

    Trim excess

    plastic 83 min. 0 min.

    Recycle

    trimmings 60 min. 0 min.Put piece in

    box 25 min. 25 min.

    Log out

    completed

    order 30 min. 15.1 min.

    Move order towarehouse 60 min. 30 min.

    Register order

    in inventory 28 min. 12.1 min.

    Total elapsed

    time 286 min. 82.2 min.

    Elapsed Time:

    Before Process

    Improvements

    Elapsed Time:

    Before Process

    Improvements

    If we assume a

    cost of $10 perhour, what is

    the cost

    savings?

    Identifying Opportunities For

    Process Improvement

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    Time Saved:286 min.

    - 82.2 min.

    203.8 min.

    60 min/hr

    3.397 hrs.

    Sub-Activity

    Trim excess

    plastic 83 min. 0 min.

    Recycle

    trimmings 60 min. 0 min.Put piece in

    box 25 min. 25 min.

    Log out

    completed

    order 30 min. 15.1 min.

    Move order towarehouse 60 min. 30 min.

    Register order

    in inventory 28 min. 12.1 min.

    Total elapsed

    time 286 min. 82.2 min.

    Elapsed Time:

    Before Process

    Improvements

    Elapsed Time:

    Before Process

    Improvements

    Cost Savings:

    3.397 hrs.

    $10/hr.

    $33.97

    Identifying Opportunities For

    Process Improvement

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    The Focus ofABC

    The Focus ofABM

    Developing improvedproduct or service costs

    given current processes

    Identifying opportunitiesfor improving processes

    Consider cost-benefits

    Implementation Of Activity-

    Based Costing & Management

    I l t ti Of A ti it

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    What Organizations Adopt ABC andABM?

    Companies facing price competition

    Companies producing many different,complex products from common

    facilities

    Implementation Of Activity-

    Based Costing And

    Management

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    What is the scope of the ABC or ABM project?

    Pilot ProjectOrganizationwide

    System

    Can You Be Sure That ABC

    And ABM Will Be Successful?

    What is a pilot

    project?

    A project of limitedscope that is intended

    to be a small-scalemodel of an

    organizational system.

    Why use a pilot

    project?

    Anticipate the linkagesacross departments,

    groups and processes.Anticipate the data

    gathering and reportingrequirements.

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    What resourcesare necessary?

    ManagementCommitment

    Personneland Time

    Technology

    Begin withexisting

    commercialsoftware

    Significant projects

    will require a three-to four-person,cross-functionalteam at least fourto six months offull-time effort

    Educate topmanagement

    as tocost/benefits

    Can You Be Sure That ABC

    And ABM Will Be Successful?

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    5-22

    How can you anticipate and overcome resistance tochange?

    Prevent or MinimizeResistance by:

    Effects of Culture

    Education and Training

    Incentives that Encourageand Reward Change

    Widespread Sponsorshipand Participation

    Be Sensitive to Differencesin National Cultures

    Can You Be Sure That ABC

    And ABM Will Be Successful?

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    5-23

    ABC and ABM require information that is not normally availablefrom an organizations information systems

    Thisinformation can

    be generatedby:Observation

    Interview

    Survey

    Can You Be Sure That ABC

    And ABM Will Be Successful?

    How do you gather information?

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    END