ABM, BPM and continuous improvement

Accounting Ahead | Original study resource | accountingahead.com.au

ABM, BPM and continuous improvement

MODULE 6 | PART D.3 | STUDENT COMPANION

Costing activities or managing them?

Activity-based costing

Links overheads to activities

Accurate costs for products and other cost objects

Mainly operational decisions

Activity-based management

Manages the activities themselves

Cuts cost and improves customer value

Strategic planning and performance

Same foundation - activity analysis - different purposes

Activity-based management in three steps

1. Analyse activities

Activity map: inputs, drivers, outputs

2. Focus on outputs

Remove or reduce activities with no

valued output

3. Improve

Single activities and the whole map -

start strategic

What shapes value chain costs

Factor Question to ask

Scale Enough capacity and volume for economies of scale?

Scope How vertically integrated - how much control over the industry value chain?

Experience Is learning lifting productivity and cutting waste and rework?

Technology Does it deliver higher quality at lower cost?

Complexity Is a broad range worth its extra support cost?

Channels Which routes to customers cost least and add most?

Operational management Capacity use, design, continuous learning, supplier and customer links

Business process management redesigns processes radically, from the customer's viewpoint and the strategy,

using the best available technology - sometimes restructuring around processes instead of functions.

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART D.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Business process redesign

Before: matching paperwork

Purchase order, receiving document and invoice

Clerks chase mismatches

500+ people in North American accounts payable

After: invoiceless processing

Order details held in a database

Pay when received goods match the order

Headcount cut by about three-quarters

Ford, early 1980s (Hammer, Harvard Business Review, 1990) - Mazda's team had about five people

Source: Hammer, M. (1990), 'Reengineering work: don't automate, obliterate', Harvard Business Review.

Is this activity value-adding?

Question If yes If no

1. Creates value for external customers? Value-adding - do it efficiently Ask question 2

2. Required by corporate rules (governance)? Keep - required Ask question 3

3. Required for sound business practice? Keep - required Ask question 4

4. Creates value for internal customers? Keep - adds value internally Target for elimination

5. Creates waste with little or no value? Improve the process to cut waste

Be realistic: non-value-adding costs (set-ups, storage, waiting, moving, inspection, rework) cannot always

vanish at once - people and equipment remain until redeployed - and total elimination can cost more than it

saves, so partial elimination may be better.

Measuring continuous improvement

Invoices processed 480

Staff hours 40

Productivity: 480 / 40 12 invoices per hour

After removing manual exceptions 15 invoices per hour

Output over input: a higher ratio is always better

Continuous improvement began with Japanese manufacturers: teamwork, empowerment and incremental

change to existing activities, often with gainsharing (staff share a portion of savings). Managers can act on

inputs, outputs or the cost driver. Social and environmental analysis extends the value chain to suppliers'

treatment of workers and communities, materials, toxic by-products, recycling and the effects of product use;

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART D.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

fines are lagging indicators.

Practice questions

MODULE 6 | PART D.3 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Dental clinic (imagined): value-adding or not?

Activity Classification

(a) Treating patients' teeth

(b) Patients waiting past their appointment time

(c) Sterilising instruments

(d) Redoing a filling that failed within a month

(e) Carrying files between rooms

(f) Keeping treatment records the regulator requires

(g) Storing excess consumables

(h) Explaining treatment options to patients

Question 2 - Productivity and gainsharing

A warehouse team picked 3,150 orders in 300 hours last month and 3,600 orders in 300 hours this month after a

layout change. (a) Calculate both productivity ratios and the improvement. (b) The change saved $9,000 of

overtime; under gainsharing staff receive 20% of savings. How much do they share?

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART D.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 6 | PART D.3 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Value-adding or not?

Activity Answer

(a) Value-adding (external customer)

(b) Non-value-adding - waiting; fix scheduling

(c) Keep - required for sound practice and safety

(d) Non-value-adding - rework (internal failure)

(e) Non-value-adding - movement; go digital

(f) Keep - required by rules (governance and compliance)

(g) Non-value-adding - storage; order smaller quantities

(h) Value-adding (external customer)

Question 2 - Productivity and gainsharing

Item Answer

Last month 3,150 / 300 = 10.5 orders per hour

This month 3,600 / 300 = 12 orders per hour

Improvement (12 - 10.5) / 10.5 = about 14%

Gainshare 20% x $9,000 = $1,800

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART D.3 | WORKED ANSWERS

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