Reducing non-value-added costs is one way to increase activity efficiency. A company’s accounting system should distinguish between value-added costs and non-value-added costs because improving activity performance requires eliminating non-value-added activities and optimizing value-added activities. A firm should identify and formally report the value- and non-value-added costs of each activity. Highlighting non-value-added costs reveals the magnitude of the waste the company is currently experiencing, thus providing some information about the potential for improvement. This encourages managers to place more emphasis on controlling non-value-added activities. Progress can then be assessed by preparing trend and cost reduction reports. Tracking these costs over time permits managers to assess the effectiveness of their activity management programs.
Knowing the amount of costs saved is important for strategic purposes. For example, if an activity is eliminated, then the costs saved should be traceable to individual products. These savings can produce price reductions for customers, making the firm more competitive. Changing the pricing strategy, however, requires knowledge of the cost reductions realized by activity analysis. A cost-reporting system, therefore, is an important ingredient in an activity-based responsibility accounting system. Value-added costs are the only costs that an organization should incur. The valueaddedstandard calls for the complete elimination of non-value-added activities; for these activities, the optimal output is zero, with zero cost. The value-added standard also calls for the complete elimination of the inefficiency of activities that are necessary but inefficiently carried out. Hence, value-added activities also have an optimal output level. A value-added standard, therefore, identifies the optimal activity output. Identifying the optimal activity output requires activity output measurement.
Setting value-added standards does not mean that they will be (or should be) achieved immediately. The idea of continuous improvement is to move toward the ideal. Workers (teams) can be rewarded for improvement. Moreover, nonfinancial activity performance measures can be used to supplement and support the goal of eliminating nonvalue- added costs (these are discussed later in the chapter). Finally, measuring the efficiency of individual workers and supervisors is not the way to eliminate non-valueadded activities. Remember, activities cut across departmental boundaries and are par of processes. Focusing on activities and providing incentives to improve processes is a more productive approach. Improving the process should lead to improved results.
By comparing actual activity costs with value-added activity costs, management can assess the level of activity inefficiency and the potential for improvement. To identify and calculate value- and non-value-added costs, output measures for each activity must be defined. Once output measures are defined, then value-added standard quantities (SQ) for each activity can be defined. Value-added costs can be computed by multiplying the value-added standard quantities by the price standard (SP). Non-value-added costs can be calculated as the difference between the actual level of the activity’s output (AQ) and the value-added level (SQ), multiplied by the standard price. These formulas are presented in Exhibit 12-2.
Knowing the amount of costs saved is important for strategic purposes. For example, if an activity is eliminated, then the costs saved should be traceable to individual products. These savings can produce price reductions for customers, making the firm more competitive. Changing the pricing strategy, however, requires knowledge of the cost reductions realized by activity analysis. A cost-reporting system, therefore, is an important ingredient in an activity-based responsibility accounting system. Value-added costs are the only costs that an organization should incur. The valueaddedstandard calls for the complete elimination of non-value-added activities; for these activities, the optimal output is zero, with zero cost. The value-added standard also calls for the complete elimination of the inefficiency of activities that are necessary but inefficiently carried out. Hence, value-added activities also have an optimal output level. A value-added standard, therefore, identifies the optimal activity output. Identifying the optimal activity output requires activity output measurement.
Setting value-added standards does not mean that they will be (or should be) achieved immediately. The idea of continuous improvement is to move toward the ideal. Workers (teams) can be rewarded for improvement. Moreover, nonfinancial activity performance measures can be used to supplement and support the goal of eliminating nonvalue- added costs (these are discussed later in the chapter). Finally, measuring the efficiency of individual workers and supervisors is not the way to eliminate non-valueadded activities. Remember, activities cut across departmental boundaries and are par of processes. Focusing on activities and providing incentives to improve processes is a more productive approach. Improving the process should lead to improved results.
By comparing actual activity costs with value-added activity costs, management can assess the level of activity inefficiency and the potential for improvement. To identify and calculate value- and non-value-added costs, output measures for each activity must be defined. Once output measures are defined, then value-added standard quantities (SQ) for each activity can be defined. Value-added costs can be computed by multiplying the value-added standard quantities by the price standard (SP). Non-value-added costs can be calculated as the difference between the actual level of the activity’s output (AQ) and the value-added level (SQ), multiplied by the standard price. These formulas are presented in Exhibit 12-2.
For flexible resources (resources acquired as needed), AQ is the actual quantity of activity used. For committed resources (resources acquired in advance of usage), AQ represents the actual quantity of activity capacity acquired, as measured by the activity’s practical capacity. This definition of AQ allows the computation of non-value-added costs for both variable and fixed activity costs. For fixed activity costs, SP is the budgeted activity costs divided by AQ, where AQ is practical activity capacity. To illustrate the power of these concepts, consider the following four production activities for a manufacturing firm: purchasing materials, molding, inspecting molds, and grinding imperfect molds. Purchasing and molding are necessary activities; inspection and grinding are unnecessary. The following data pertain to the four activities:
Notice that the value-added standards (SQ) for inspection and grinding call for their elimination. Ideally, there should be no defective molds; by improving quality, changing production processes, and so on, inspection and grinding can eventually be eliminated. Exhibit 12-3 classifies the costs for the four activities as value-added or non-value-added. For simplicity and to show the relationship to actual costs, the actual price per unit of the activity driver is assumed to be equal to the standard price. In this case, the value-added cost plus the non-value-added cost equals actual cost.
The cost report in Exhibit 12-3 allows managers to see the non-value-added costs; as a consequence, it emphasizes the opportunity for improvement. By redesigning the products and reducing the number of parts required, purchase time can be reduced. By improving the molding process and labor skill, management can reduce the demands for molding time, inspection, and grinding. Thus, reporting value- and non-value-added
The cost report in Exhibit 12-3 allows managers to see the non-value-added costs; as a consequence, it emphasizes the opportunity for improvement. By redesigning the products and reducing the number of parts required, purchase time can be reduced. By improving the molding process and labor skill, management can reduce the demands for molding time, inspection, and grinding. Thus, reporting value- and non-value-added
costs at a point in time may trigger actions to manage activities more effectively. Once they see the amount of waste, managers may be induced to search for ways to improve activities and bring about cost reductions. Reporting these costs may also help managers improve planning, budgeting, and pricing decisions. For example, a manager might consider it possible to lower a selling price to meet a competitor’s price if that manager can see the potential for reducing non-value-added costs to absorb the effect of the price reduction.
.
0 comments:
Post a Comment