Cost Control Chapter 12

Front 1

What assumptions can we make about Processes?

Back 1

1. Processes are the source of many improvement opportunities.
2. Processes are made up of activities
3. Improving processes means improving the way activities are performed.
4. Therefore, management of activities (NOT costs) is the key to successful control in continuous improvement environment.

Front 2

Activity Based Management

Back 2

focus on activities to improve customer value and, therefore profits.

Front 3

Process Value Analysis

Back 3

focuses on accountability for activities rather than costs

Front 4

PVA is concerned with 3 things: what are they?

Back 4

1. Driver Analysis
2. Activity Analysis
3. Performance measurement

Front 5

Driver Analysis

Back 5

identifying factors that are the root causes of activity costs

Front 6

Activity Analysis

Back 6

= the process of identifying, describing, and evaluating the activities an organization performs.

Front 7

Value-added activities

Back 7

activities necessary to remain in business. They contribute to customer value or help meet organizational needs.

Front 8

Nonvalue-added activities

Back 8

unnecessary activities that are not valued by internal or external customers.

Front 9

Kaizen costing

Back 9

constant incremental improvements to existing processes and products. Cost reduction can be gained through activity management.

Front 10

Activity management can reduce cost in four ways:

Back 10

1. Activity elimination = eliminating non-value added
activities.
2. Activity selection = activities are caused by design strategy selection. The lowest cost design strategy should be selected.
3. Activity reduction = decreases in the time and resources required by an activity.
4. Activity sharing = use of economy of scale

Front 11

Performance measurement

Back 11

= assessment of how well an activity was performed and the results achieved. There are three dimensions of activity performance:

Hint 11

1. efficiency = the relationship of activity outputs to activity inputs
2. quality = doing the activity right the first time it is performed
3. time = time required to perform an activity

Front 12

Financial Measures of Activity Efficiency

Back 12

Financial measures of performance should provide specific information about the dollar effects of activity performance changes. They will indicate potential and actual savings. Financial measures of activity efficiency include:

Hint 12

1. Reporting Value and Nonvalue-Added Costs
2. The role of Kaizen Standards
3. Benchmarking
4. Activity Flexible Budgeting
5. Activity Capacity Management

Front 13

1. Reporting Value and Nonvalue-Added Costs

Back 13

A firm should identify and report the value and nonvalue-added costs of each activity. Value-added costs are the only costs an organization should incur. The value-added standard calls for the elimination of nonvalue-added activities. Therefore a value-added standard identifies the optimal activity output.

Hint 13

By comparing actual activity costs with value-added activity cost, management can assess the level of activity inefficiency and the potential for improvement. (see exhibit 12-3 on page 436)

Front 14

2. The role of Kaizen Standards

Back 14

Kaizen costing = concerned with reducing the costs of existing products and processes. It really means, reduce existing nonvalue-added costs.

A kaizen standard reflects the planned improvement for the upcoming period.

Front 15

3. Benchmarking

Back 15

uses best practices found within and outside
the organization as the standard for evaluating and improving
activity performance.

1. Internal Benchmarking = best practices units share information with other

2. External Benchmarking = comparison with others outside your organization

Hint 15

1. Competitive benchmarking = comparison of activity performance with direct competition
2. Functional benchmarking = comparison with firms in the same industry but do not compete in the same markets.
3. Generic benchmarking = comparison of best practices of noncompetitors outside a firm’s industry

Front 16

4. Activity Flexible

Back 16

= the prediction of what activity costs will be as activity output changes.

Front 17

5. Activity Capacity Management

Back 17

= the number of times an activity can be performed.

Front 18

Financial-Based versus Activity-Based Responsibility Accounting

Responsibility Accounting systems are defined by four elements:

Back 18

1. Assigning responsibility
2. Establishing performance measures or benchmarks
3. Evaluating performance
4. Assigning rewards

Front 19

There are three types of responsibility accounting systems

Back 19

1. Financial-based responsibility accounting systems = assign responsibility to organizational units and express performance measures in financial terms.
2. Activity-based responsibility accounting systems = assigns responsibility to processes and uses both financial and nonfinancial measures of performance, thus emphasizing both financial and process perspectives.

See exhibits 12-12, 12-13, 12-14, 12-15 on pages 446 through 448.


3. Srategic –based responsibility accounting systems (chapter 13)