Activity Performance Measurement

Activity Performance Measurement
Assessing how well activities (and processes) are performed is fundamental to

management’s efforts to improve profitability. Activity performance measures exist in both
financial and nonfinancial forms. These measures are designed to assess how well an activity
was performed and the results achieved. They are also designed to reveal if constant
improvement is being realized. Measures of activity performance center on three major
dimensions: (1) efficiency, (2) quality, and (3) time.
Efficiency focuses on the relationship of activity inputs to activity outputs. For example,
one way to improve activity efficiency is to produce the same activity output with lower cost for
the inputs used. Quality is concerned with doing the activity right the first time it is performed. If
the activity output is defective, then the activity may need to be repeated, causing unnecessary
cost and reduction in efficiency. The time required to perform an activity is also critical. Longer
times usually mean more resource consumption and less ability to respond to customer demands.
Time measures of performance tend to be nonfinancial, whereas efficiency and quality measures
are both financial and nonfinancial.
Measures of Activity Performance
Knowing how well we are currently performing an activity should disclose the potential
for doing better. Since many of the nonfinancial measures that will be discussed for the process
perspective of the Balanced Scorecard (strategic-based responsibility accounting system
discussed in Chapter 16) also apply at the activity level, this section will emphasize financial
measures of activity performance. Financial measures of performance should also provide
specific information about the dollar effects of activity performance changes. Thus, financial
measures should indicate both potential and actual savings. Financial measures of activity
efficiency include (1) value- and non-value-added activity cost reports, (2) trends in activity cost
reports, (3) kaizen standard setting, (4) benchmarking, and (5) life-cycle costing.
Value- and Non-Value-Added Cost Reporting
Reducing non-value-added costs is one way to increase activity efficiency. A company’s
accounting system should distinguish between value-added costs and nonvalue-added costs
because improving activity performance requires eliminating nonvalue-added activities and
optimizing value-added activities. Hence, a firm should identify and formally report the value-
added 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.
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, not to achieve it immediately. Workers (teams) can be
rewarded for improvement.
Trend Reporting
As RTP, Inc., takes actions to improve activities, do the cost reductions follow as
expected? One way to answer this question is to compare the costs for each activity over time.
The goal is activity improvement as measured by cost reduction, and so we should see a decline
in non-value-added costs from one period to the next—provided the activity analysis is effective.
Assume, for example, that at the beginning of 2008, four major activity-management decisions
were implemented: the use of statistical process control, product redesign, a labor-training
program, and a supplier evaluation program.
The Role of Kaizen Standards
Kaizen costing is concerned with reducing the costs of existing products and processes.
In operational terms, this translates into reducing non-value-added costs. Controlling this cost
reduction process is accomplished through the repetitive use of two major subcycles: (1) the
kaizen, or continuous improvement, cycle and (2) the maintenance cycle. The kaizen subcycle is
defined by a Plan-Do-Check-Act sequence. If a company emphasizes reducing non-value-added
costs, the amount of improvement planned for the coming period (month, quarter, etc.) is set (the
Plan step). A kaizen standard reflects the planned improvement for the upcoming period. The
planned improvement is assumed to be attainable, so kaizen standards are a type of currently
attainable standard.
Benchmarking
Another approach to standard setting that is used to help identify opportunities for
activity improvement is called benchmarking. Benchmarking uses best practices as the standard
for evaluating activity performance. Within an organization, different units (for example,
different plant sites) that perform the same activities are compared. The unit with the best
performance for a given activity sets the standard. Other units then have a target to meet or
exceed. Furthermore, the best practices unit can share information with other units on how it has
achieved its superior results. For this process to work, it is necessary to ensure that activity
definitions and activity output measures are consistent across units
Drivers and Behavioral Effects
Activity output measures are needed to compute and track non-value-added costs.
Reducing a non-value-added activity should produce a reduction in the demand for the activity
and, therefore, a reduction in the activity output measures. If a team’s performance is affected by
its ability to reduce non-value-added costs, then the selection of activity drivers (as output
measures), and how they are used, can affect behavior. For example, if the output measure
chosen for setup costs is setup time, an incentive is created for workers to reduce setup time.
Since the value-added standard for setup costs calls for their complete elimination, the incentive
to drive setup time to zero is compatible with the company’s objectives, and the induced
behavior is beneficial.
Activity Capacity Management
Activity capacity is the number of times an activity can be performed. Activity drivers
measure activity capacity. For example, consider the inspecting activity for batches of hydraulic
cylinders produced by RTP, Inc. A sample from each batch is taken to determine the batch’s
overall quality. The demand for the inspection activity determines the amount of activity
capacity that is required. For instance, suppose that the number of batches inspected measures
activity output. Now, suppose that 60 batches are scheduled to be produced. Thus, the required
capacity is 60 batches.

Activity Performance Measurement

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Assessing how well activities (and processes) are performed is fundamental to

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