Copyright 1998 Dekker, Ltd. 1. 2 Managerial Accounting Essentials Become Familiar with Terminology Emphasize Basic Concepts Behind Activity-Based Cost.

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2

Managerial Accounting EssentialsManagerial Accounting Essentials

• Become Familiar with Terminology

• Emphasize Basic Concepts Behind Activity-Based Cost and ABM

• Apply concepts thru Class Exercises

• Become Familiar with Terminology

• Emphasize Basic Concepts Behind Activity-Based Cost and ABM

• Apply concepts thru Class Exercises

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Dekke

r, Ltd.Managerial Accounting EssentialsManagerial Accounting Essentials

This introductory course in Managerial Accounting with an emphasis on Activity-Based Cost and Management is based on the textbook, Management Accounting, 2 ed., written by Anthony A. Atkinson, Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young. Concepts and terms from Chapters 1 through 5 plus 9 and 10 will be highlighted for this course.

Conventions used throughout the course:

- indicates a definition

- indicates a key concept or equation

This introductory course in Managerial Accounting with an emphasis on Activity-Based Cost and Management is based on the textbook, Management Accounting, 2 ed., written by Anthony A. Atkinson, Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young. Concepts and terms from Chapters 1 through 5 plus 9 and 10 will be highlighted for this course.

Conventions used throughout the course:

- indicates a definition

- indicates a key concept or equation

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Dekke

r, Ltd.Objectives of Management

AccountingObjectives of Management

Accounting

• Improve the quality of operations

• Lower the cost of operations

• Increase the responsiveness of operations for customer needs

• Improve the quality of operations

• Lower the cost of operations

• Increase the responsiveness of operations for customer needs

5

Lesson 1 - Management Accounting -Information that Creates Value

Lesson 1 - Management Accounting -Information that Creates Value

• Differences between financial and management accounting

• The informational needs of management accounting

• Activities as the primary focus for measuring and managing performance

• Differences between financial and management accounting

• The informational needs of management accounting

• Activities as the primary focus for measuring and managing performance

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Basic Features of AccountingBasic Features of Accounting

Financial Accounting Management Accounting

AudienceExternal: Stockholders, creditors,tax authorities

Internal: Workers, managers,executives

PurposeReport on past performance toexternal parties; contracts withowners and lenders

Inform internal decisions made byemployees and managers;feedback and control on operatingperformance

Timeliness Delayed; historical Current, future oriented

Restrictions

Regulated; rules driven byGenerally Accepted AccountingPrinciples (GAAP) andgovernment authorities

Process driven; systems andinformation determined bymanagement to meet strategicand operational needs

Type of Information Financial measurements only

Financial plus operational andphysical measurements onprocesses, technologies,suppliers, customers, andcompetitors

Nature ofInformation

Objective, auditable, reliable,consistent, precise

More subjective and judgmental;valid, relevant; accurate;consistent

ScopeHighly aggregate; report on entireorganization

More drill-down; inform localdecisions and actions

Financial Accounting Management Accounting

AudienceExternal: Stockholders, creditors,tax authorities

Internal: Workers, managers,executives

PurposeReport on past performance toexternal parties; contracts withowners and lenders

Inform internal decisions made byemployees and managers;feedback and control on operatingperformance

Timeliness Delayed; historical Current, future oriented

Restrictions

Regulated; rules driven byGenerally Accepted AccountingPrinciples (GAAP) andgovernment authorities

Process driven; systems andinformation determined bymanagement to meet strategicand operational needs

Type of Information Financial measurements only

Financial plus operational andphysical measurements onprocesses, technologies,suppliers, customers, andcompetitors

Nature ofInformation

Objective, auditable, reliable,consistent, precise

More subjective and judgmental;valid, relevant; accurate;consistent

ScopeHighly aggregate; report on entireorganization

More drill-down; inform localdecisions and actions

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Dekke

r, Ltd.Management Accounting SystemManagement Accounting System

Operational and

Financial Data

Management

Accounting

Information

INPUTS

PROCESSING

OUTPUTS

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Dekke

r, Ltd.Management AccountingManagement Accounting

The process of identifying, measuring, reporting and analyzing financial as well as operating information for the internal users regarding the economic condition of an organization

The process of identifying, measuring, reporting and analyzing financial as well as operating information for the internal users regarding the economic condition of an organization

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Dekke

r, Ltd.Comparisons of the SystemsComparisons of the Systems

Managerial

Accounting

Internal constituencies

Feedback and control

Current, future oriented

Process driven

Financial, operational,

physical measures

More subjective

More drill-down

Managerial

Accounting

Internal constituencies

Feedback and control

Current, future oriented

Process driven

Financial, operational,

physical measures

More subjective

More drill-down

Financial

Accounting

External constituencies

Past performance

Historically oriented

Rules driven

Only financial measures

Objective

Highly aggregate

Financial

Accounting

External constituencies

Past performance

Historically oriented

Rules driven

Only financial measures

Objective

Highly aggregate

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Dekke

r, Ltd.The Various Levels for ReportingThe Various Levels for Reporting

Senior Executives

Upper/

Middle

Management

Upper/

Middle

Management

Operational Operational Operational

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Dekke

r, Ltd.Operational LevelOperational Level

• Level of detail– Disaggregate

• Types– Inputs used– Outputs produced– Quality of service or production

process– Very current

• Frequency– Very Frequent

• Level of detail– Disaggregate

• Types– Inputs used– Outputs produced– Quality of service or production

process– Very current

• Frequency– Very Frequent

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Dekke

r, Ltd.Middle/Upper ManagementMiddle/Upper Management

• Level of detail– More aggregate

• Types– Resources used– Efficiency– Quality of work performed– Profitability– Current and future

• Frequency– Frequent

• Level of detail– More aggregate

• Types– Resources used– Efficiency– Quality of work performed– Profitability– Current and future

• Frequency– Frequent

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Dekke

r, Ltd.Senior ExecutivesSenior Executives

• Level of detail– Highly aggregate

• Types– Profitability– Market opportunities and threats– Customer loyalty and satisfaction– Technological innovations– Current and future

• Frequency– Less Frequent

• Level of detail– Highly aggregate

• Types– Profitability– Market opportunities and threats– Customer loyalty and satisfaction– Technological innovations– Current and future

• Frequency– Less Frequent

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Dekke

r, Ltd.Functions of Management

Accounting InformationFunctions of Management Accounting Information

Operational Control

Customer Costing

Product Costing

Management Control

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Dekke

r, Ltd.Functions of Management

Accounting InformationFunctions of Management Accounting Information

Operational ControlProvide feedback information about theefficiency and quality of tasks performed

Product andCustomer Control

Measure the costs of resources used toproduce a project, product or serviceand market and deliver the project,product or service to customers

ManagementControl

Provide information about theperformance of managers and operatingunits

Strategic Control

Provide information about theenterprise’s financial and long-runcompetitive performance, marketconditions, customer preferences, andtechnological innovations; life-cycleanalysis

Operational ControlProvide feedback information about theefficiency and quality of tasks performed

Product andCustomer Control

Measure the costs of resources used toproduce a project, product or serviceand market and deliver the project,product or service to customers

ManagementControl

Provide information about theperformance of managers and operatingunits

Strategic Control

Provide information about theenterprise’s financial and long-runcompetitive performance, marketconditions, customer preferences, andtechnological innovations; life-cycleanalysis

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Dekke

r, Ltd.Service Industries and CompaniesService Industries and Companies

ServiceIndustries

Service Companies

Financial InstitutionsCommercial banks, investment banks, mortgagecompanies, insurance companies, brokeragecompanies

TransportationRailroads, airlines, truck lines, bus companies,package delivery, overnight delivery, postalservice

Telecommunications Local phone service, long-distance voice and datacommunications

Merchandising Supermarkets, department stores, discountstores, wholesalers, warehouse club stores

Professionalservices

Consulting, public accounting, engineering andsoftware firms

Health care Physician groups, hospitals, outpatient clinics

Retailing Grocery chains, department stores, gasolinestations, mass-merchandise department stores

ServiceIndustries

Service Companies

Financial InstitutionsCommercial banks, investment banks, mortgagecompanies, insurance companies, brokeragecompanies

TransportationRailroads, airlines, truck lines, bus companies,package delivery, overnight delivery, postalservice

Telecommunications Local phone service, long-distance voice and datacommunications

Merchandising Supermarkets, department stores, discountstores, wholesalers, warehouse club stores

Professionalservices

Consulting, public accounting, engineering andsoftware firms

Health care Physician groups, hospitals, outpatient clinics

Retailing Grocery chains, department stores, gasolinestations, mass-merchandise department stores

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Dekke

r, Ltd.ActivitiesActivities

Represent the “verbs” of a company

• Are “Product-Oriented”• Work output will have a discrete unit of

measurement• These “verbs” consume an organization’s

resources and employees

Represent the “verbs” of a company

• Are “Product-Oriented”• Work output will have a discrete unit of

measurement• These “verbs” consume an organization’s

resources and employees

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Dekke

r, Ltd.Activity-based CostingActivity-based Costing

A procedure that measures the costs of objects, such as products,

services and customers.

Activity-based costing (ABC) first assigns resource costs to the

activities performed by the organization.

Then activity costs are assigned to the products, customers, and services that benefit from or are creating the

demand for the activities.

A procedure that measures the costs of objects, such as products,

services and customers.

Activity-based costing (ABC) first assigns resource costs to the

activities performed by the organization.

Then activity costs are assigned to the products, customers, and services that benefit from or are creating the

demand for the activities.

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• Produce a product• Indirect contact with

customers• Have inventory• Quality to build into

production process

• Produce a product• Indirect contact with

customers• Have inventory• Quality to build into

production process

• Provide a service, generally no product

• More direct contact with customers

• No inventory, per se• Quality hard to control

in advance

• Provide a service, generally no product

• More direct contact with customers

• No inventory, per se• Quality hard to control

in advance

Manufacturing vs Service FunctionManufacturing vs Service Function

Service OrganizationService OrganizationManufacturing OrganizationManufacturing Organization

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Dekke

r, Ltd.Continuous ImprovementContinuous Improvement

Empowering employees to continually problem-

solve and search for ways to improve organizational processes

Empowering employees to continually problem-

solve and search for ways to improve organizational processes

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Dekke

r, Ltd.Employee EmpowermentEmployee Empowerment

Managers give employees who are closest to operating processes, customers, and suppliers the rights to make decisions. Employees are encouraged to solve problems and devise creative new approaches for performing work and satisfying customers.

Managers give employees who are closest to operating processes, customers, and suppliers the rights to make decisions. Employees are encouraged to solve problems and devise creative new approaches for performing work and satisfying customers.

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Dekke

r, Ltd.Employee Empowerment EnablesEmployee Empowerment Enables

Sharing pertinent financial information with operators allows them to do

the following:– Identify the opportunities for significant cost

reduction– Set priorities for improvement projects– Make tradeoffs among alternative ways to

improve operations– Evaluate proposed investments to improve

operations– Assess the consequences of their

improvement activities

Sharing pertinent financial information with operators allows them to do

the following:– Identify the opportunities for significant cost

reduction– Set priorities for improvement projects– Make tradeoffs among alternative ways to

improve operations– Evaluate proposed investments to improve

operations– Assess the consequences of their

improvement activities

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Dekke

r, Ltd.Total Quality ManagementTotal Quality Management

A philosophy that attempts to eliminate all defects, waste,

and activities that do not add value to customers

A philosophy that attempts to eliminate all defects, waste,

and activities that do not add value to customers

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Dekke

r, Ltd.Balanced ScorecardBalanced Scorecard

A multi-dimensional measurement system

that translates an organization’s mission and strategy into performance measures.

A multi-dimensional measurement system

that translates an organization’s mission and strategy into performance measures.

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Dekke

r, Ltd.Balanced Business ScorecardBalanced Business Scorecard

Financial Perspective

How do we look to our

shareholders?

Business Process

What business

processes are the

value drivers?

Organization Learning

Are we able to sustain innovations,

change and improvement?

Vision

&

Strategy

Customer Perspective

How do we look to our

customers?

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The Internal Business Process Perspective

The Internal Business Process Perspective

Identify

the

Market

Create the

Product/

Service

Offering

Build the

Products/

Service

Deliver the

Products/

Services

Service

the

Customer

Customer Need

Identified

Customer Need

Satisfied

Innovation

Process

Operations

Process

Post-Sale

Service

Process

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Dekke

r, Ltd.Behavioral Implications of

Management Accounting Information

Behavioral Implications of Management Accounting

Information

• Information is never neutral

• People react to measurements

• People familiar with “old” systems often resist “new” systems

• Unexpected actions may result as employees respond to new performance measures

• Information is never neutral

• People react to measurements

• People familiar with “old” systems often resist “new” systems

• Unexpected actions may result as employees respond to new performance measures

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Dekke

r, Ltd.Applying the ConceptsApplying the Concepts

The Differences Between Financial and Managerial Accounting

Exercise #1

Read Problem #1-16, on page 37, of Management Accounting, and answer the following question:

What are the advantages and disadvantages of having separate departments for financial accounting and management accounting?

The Differences Between Financial and Managerial Accounting

Exercise #1

Read Problem #1-16, on page 37, of Management Accounting, and answer the following question:

What are the advantages and disadvantages of having separate departments for financial accounting and management accounting?

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Dekke

r, Ltd.Applying the ConceptsApplying the Concepts

Employee Empowerment

Exercise #2

Read the information provided in Case Study # 1-20, on page 38, of Management Accounting, and

answer the following questions:

1. What information needs did the production workers have in the old environment?

2. What information do you recommend be supplied to the production workers in the new environment that

emphasizes quality, defect reduction, problem-solving, and teamwork?

Employee Empowerment

Exercise #2

Read the information provided in Case Study # 1-20, on page 38, of Management Accounting, and

answer the following questions:

1. What information needs did the production workers have in the old environment?

2. What information do you recommend be supplied to the production workers in the new environment that

emphasizes quality, defect reduction, problem-solving, and teamwork?

30

Lesson 2 - The Organization as a System of Activities

Lesson 2 - The Organization as a System of Activities

• The organization as a sequence of activities in a value chain

• The role of the customer in defining focus

• The nature of value-added and nonvalue-added activities

• The organization as a sequence of activities in a value chain

• The role of the customer in defining focus

• The nature of value-added and nonvalue-added activities

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Dekke

r, Ltd.Value ChainValue Chain

A sequence of activities that creates a good or service in which each step of the

sequence should add something that the customer values to the product.

A sequence of activities that creates a good or service in which each step of the

sequence should add something that the customer values to the product.

CustomerCustomer

ProductProduct

ActivitiesActivities ActivitiesActivities

ActivitiesActivities

ActivitiesActivitiesActivitiesActivities

ActivitiesActivities

ActivitiesActivities

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Dekke

r, Ltd.Key Elements of the Value ChainKey Elements of the Value Chain

(3)

Output Activities

Selling, shipping

service

(2)

Processing

Activities

Making, moving,

storing

inspecting

(1)

Input Activities

Product design, process design,

purchasing, receiving, hiring,

training

(4)

Administrative Activities

Personnel, finance, legal,

accounting, research

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Dekke

r, Ltd.StakeholdersStakeholders

Those people, groups, or institutions who define

an organization’s success or who can affect its ability

to achieve its objectives.

Those people, groups, or institutions who define

an organization’s success or who can affect its ability

to achieve its objectives.

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process objectives relating to customers

value chain/process constraints

effects of value chaindesign on stakeholdersother than customers

StakeholderObjectives:

customersemployeessuppliersowners

community

OrganizationObjectives

Organization Control

Customer Satisfaction with Products

Process ControlValue chain design

and operation

Domain of Management Accounting

the organization’sprimary values

compare actual with plan

effects of customer satisfaction on other stakeholders

compare actual with planproducts

Stakeholders, the Value Chain and Organization Objectives

Stakeholders, the Value Chain and Organization Objectives

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Dekke

r, Ltd.Stakeholder GroupsStakeholder Groups

• Each group makes contributions to the organization, has requirements the organization must meet, and has an effect on the value chain

• Each group makes contributions to the organization, has requirements the organization must meet, and has an effect on the value chain

Employees Community

CustomersSuppliers

Owners

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Dekke

r, Ltd.Process ControlProcess Control

Assesses the operating performance of the value chain in meeting customer requirements

Focuses on short-term, is often continuous

Measures short-term performance against short-run targets or standards

Assesses the operating performance of the value chain in meeting customer requirements

Focuses on short-term, is often continuous

Measures short-term performance against short-run targets or standards

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Dekke

r, Ltd.Critical Success FactorsCritical Success Factors

Elements of performance required for an organization’s success,

for example, for customers, service, quality, and cost; for employees, job satisfaction and safety; for partners and owners, an adequate return on investment; on the community, conformance to

laws

Elements of performance required for an organization’s success,

for example, for customers, service, quality, and cost; for employees, job satisfaction and safety; for partners and owners, an adequate return on investment; on the community, conformance to

laws

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Dekke

r, Ltd.Examples of Critical Success FactorsExamples of Critical Success Factors

ServiceService

QualityQuality

CostCost

SafetySafety

JobJob

SatisfactionSatisfaction

ConformanceConformance

to Lawsto Laws

Customer Employee Community

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Dekke

r, Ltd.ServiceService

The product’s tangible and intangible features

promised to the customer; service is also known as value in use

The product’s tangible and intangible features

promised to the customer; service is also known as value in use

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Dekke

r, Ltd.QualityQuality

The difference between the promised and the realized

level of service; conformance to specifications

The difference between the promised and the realized

level of service; conformance to specifications

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Dekke

r, Ltd.Service and QualityService and Quality

What the customer

wants

What the customer is

promised

What the customer is

given

The Service Gap The Quality Gap

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Dekke

r, Ltd.Customer PerformanceCustomer Performance

Critical SuccessFactors

Examples of Critical PerformanceIndicators

Service

Number of customers, number of newcustomers, number of customers lost, marketshare, purchases per customer, time to servecustomers during peak periods, time torespond to customer orders, time taken toresolve customer complaints

Quality

Number of customer complaints per 1,000orders filled, customer satisfaction surveys,percent on-time delivery, returns, warrantyclaims

Cost

Ratio of costs to revenues, ratio of amount ofmaterial in final product to amount of materialpurchased, cost of a particular activity,customer profitability, ratio of labor allowed forwork done to total labor, sales per hour duringpeak operations

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Necessary Qualities of Performance

Necessary Qualities of Performance

Effectiveness– Ability to accomplish objectives– Determined by process design

Effectiveness– Ability to accomplish objectives– Determined by process design

Efficiency– Ability to use fewest possible resources to

accomplish objectives– Determined by process design and how the

process operates

Efficiency– Ability to use fewest possible resources to

accomplish objectives– Determined by process design and how the

process operates

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Dekke

r, Ltd.Critical Performance IndicatorsCritical Performance Indicators

• Consider activities from the customer’s perspective

• Evaluate using customer-validated measures

• Are comprehensive

• Provide feedback

• Consider activities from the customer’s perspective

• Evaluate using customer-validated measures

• Are comprehensive

• Provide feedback

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Dekke

r, Ltd.Customer ValidationCustomer Validation

Inputs

Resources used in activities

Outcomes

How the customer values the result of

the activity

Process

Activities which transform

resources into outputs

Outputs

Physical measures of activity

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Dekke

r, Ltd.Inputs, Outputs, and OutcomesInputs, Outputs, and Outcomes

Organization Input Output Outcome

GovernmentEmploymentOffice

Hours ofcounseling timepaid for by thegovernment

Number of hourscounseled

Number of jobsfound that meetclients’ legitimateexpectations

Police StreetPatrols

Cost of patrollingHours spentpatrolling

Effect of patrollingon crime rate

ResearchLaboratory

Number oflaboratory workerhours paid for

Number oflaboratory hoursworked

Number of patentsproduced or theprofitability of theproductsproduced

SawmillVolume of logsprocessed

Volume of lumbercreated

Net realizablevalue of lumbercreated

Organization Input Output Outcome

GovernmentEmploymentOffice

Hours ofcounseling timepaid for by thegovernment

Number of hourscounseled

Number of jobsfound that meetclients’ legitimateexpectations

Police StreetPatrols

Cost of patrollingHours spentpatrolling

Effect of patrollingon crime rate

ResearchLaboratory

Number oflaboratory workerhours paid for

Number oflaboratory hoursworked

Number of patentsproduced or theprofitability of theproductsproduced

SawmillVolume of logsprocessed

Volume of lumbercreated

Net realizablevalue of lumbercreated

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Dekke

r, Ltd.SignalsSignals

• A warning signal triggers an investigation into the cause of an underlying problem

• A diagnostic signal provides evidence of the nature of an underlying process problem and may suggest a way to deal with it

• A warning signal triggers an investigation into the cause of an underlying problem

• A diagnostic signal provides evidence of the nature of an underlying process problem and may suggest a way to deal with it

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Dekke

r, Ltd.ControlControl

The set of methods and tools that organization members use to keep the organization on track toward achieving its objectives

The set of methods and tools that organization members use to keep the organization on track toward achieving its objectives

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Dekke

r, Ltd.Control May Be Exercised By:Control May Be Exercised By:

• Ensuring compliance with standard operating procedures

• Motivating people to be creative in meeting customer objectives

• Ensuring compliance with standard operating procedures

• Motivating people to be creative in meeting customer objectives

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Dekke

r, Ltd.Control - Accounting the Old WayControl - Accounting the Old Way

• Emphasis on potential or past performance encourages working harder and faster

• Associated with “Managing by the Numbers”

• Emphasis on potential or past performance encourages working harder and faster

• Associated with “Managing by the Numbers”

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Problems with Managing by the Numbers

Problems with Managing by the Numbers

• Ineffective

• Assumes cost to be the only relevant measure of performance

• Does not recognize the reasons for costs in an organization

• Ineffective

• Assumes cost to be the only relevant measure of performance

• Does not recognize the reasons for costs in an organization

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Dekke

r, Ltd.Control - Accounting Under ABCControl - Accounting Under ABC

Emphasis on improving processes and eliminating things that do not improve the product encourages working smarter

Emphasis on improving processes and eliminating things that do not improve the product encourages working smarter

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Understanding Cost Control Under Activity-Based Management

Understanding Cost Control Under Activity-Based Management

Activity-Based Management approaches costs by studying the need, effectiveness, and efficiency of activities which create the costs

Activity-Based Management approaches costs by studying the need, effectiveness, and efficiency of activities which create the costs

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Dekke

r, Ltd.How Activities Create CostHow Activities Create Cost

Activities Undertaken Resources Used Costs

Activity 1

Value added, inefficient

Activity 2

Nonvalue added, efficient

Activity 3

Nonvalue added, ineffcient

Activity 4

Value added, efficient

Materials

Labor

Equipment

$

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Dekke

r, Ltd.Value-Added ActivitiesValue-Added Activities

An activity that, if eliminated, in the long run would reduce the product’s or service’s value to the customer

An activity that, if eliminated, in the long run would reduce the product’s or service’s value to the customer

56C

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Dekke

r, Ltd.NonValue-Added ActivityNonValue-Added Activity

An activity that presents the opportunity for costs reduction without reducing the product’s or service’s potential value to the customer

An activity that presents the opportunity for costs reduction without reducing the product’s or service’s potential value to the customer

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Dekke

r, Ltd.Steps in Activity AnalysisSteps in Activity Analysis

(1)

Identify process activities

(1)

Identify process activities

(2)

Chart the existing process

(2)

Chart the existing process

(3)

Classify all activities

(3)

Classify all activities

(4)

Continuously improve all activities and plan to eliminate

nonvalue-added activities

(4)

Continuously improve all activities and plan to eliminate

nonvalue-added activities

58C

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Dekke

r, Ltd.Applying the ConceptsApplying the Concepts

Product Service Features

Exercise #1

For each of the following products, what are the three most important elements of service:

1 television set

2 visit to the doctor

3 trip on an airplane

Product Service Features

Exercise #1

For each of the following products, what are the three most important elements of service:

1 television set

2 visit to the doctor

3 trip on an airplane

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Dekke

r, Ltd.Applying the ConceptsApplying the Concepts

The Elements of Quality

Exercise #2

For each of the following products, suggest three measures of quality:

1 television set

2 visit to the doctor

3 trip on an airplane

The Elements of Quality

Exercise #2

For each of the following products, suggest three measures of quality:

1 television set

2 visit to the doctor

3 trip on an airplane

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Dekke

r, Ltd.