CHAPTER 5

ACTIVITY- BASED MANAGEMENT

QUESTIONS FOR WRITING AND DISCUSSION

1.

The two dimensions are the cost

dimension and the process dimension.
The cost di- mension is concerned with
accurate as- signment of costs to cost
objects, such as products
and
customers.
Activity-based costing is
the focus of this dimension. The
second dimension the process
dimen- sion provides information
about why work is done and how well it
is done. It is con- cerned with cost
driver analysis, activity analysis, and
performance
measurement. This
dimension offers the connection to the
continuous improvement world found in
the
advanced
manufacturing
environment.

2. A
functional-based
responsibility
accounting system is characterized
by four elements: (1) a responsibility
center, where responsi- bility is
assigned to an individual in charge
(responsibility is usually defined in
financial terms); (2) the setting of
budgets and stan- dards to serve as
benchmarks
for
performance
measurement; (3) measurement of
performance by comparing actual
outcomes with budgeted outcomes;
and (4) individuals being rewarded or
penalized according to management
policies.
3.

In an activity-based responsibility
accounting system, the focus of control
shifts from re- sponsibility centers to
processes and teams. Management is
concerned with how work is done, not
with where it is done. Process improvement and process innovation are
em- phasized. Standards tend to be
optimal, dy- namic, and process

oriented. Performance measurement

focuses on processes and ac- tivities
that define the processes. Finally,
there tends to be more emphasis on
group rewards than on individual
rewards.
4.

Driver analysis is concerned with

identifying the root causes of activity
costs.
Knowing the root causes of
activity costs is the key to improvement
and innovation. Once a man- ager
understands why costs are being incurred, then efforts can be taken to
improve cost efficiency.

5.

6.

Activity inputs are the resources

consumed by an activity in producing
its output. Activity output is the result
or product of an activity. Activity
output measurement simply means
the number of times the activity is
per- formed.

are costs caused by activities that are

necessary and efficient- ly executed.

Activity analysis is concerned with

identify- ing activities performed by an
organization, assessing their value
to the organization, and selecting
and keeping only those that are
value adding. Selecting and keeping
value-adding activities brings about
cost re- duction
and
greater
operating efficiency, thus providing
support for the objective of continuous
improvement.

7. Value-added activities are necessary

activi- ties. Activities are necessary if
they are mandated or if they are not
mandated
and
satisfy
three
conditions: (1) they cause a change of
state, (2) the change of state is not
achievable by preceding activities,
and (3) they enable other activities to
be per- formed. Value-added costs

109

8.

Nonvalue-added activities are

unnecessary activities or those that are
necessary but in- efficient and
improvable. An example is moving
goods. Nonvalue-added costs are
those costs caused by nonvalue-added
ac- tivities. An example is the cost of
materials handling.

9.

(1)
Activity
elimination the
identification
and
elimination
of
activities that fail to add value. (2)
Activity selection the process of
choosing among different sets of
activities
caused
by
competing
strategies. (3) Activity reduction the
process of decreasing the time and
resources required by an activity. (4)
Activity sharing increasing the
efficien- cy of necessary
activities
using economies of scale.

10.

Value-added standards represent the

abso- lute levels of efficiency for
activities. The costs that should be
incurred for these abso-

lute levels are value-added costs.

Any dif- ference
between
the
actual costs incurred and the
ideal costs are nonvalue-added
costs.
11.

Trend reports will reveal the

progress made over time in
reducing nonvalue-added costs.

12.

A kaizen standard is the planned

improve- ment for the coming
period. The kaizen sub- cycle
implements
the improvement,
checks it, and locks it in and then
begins a search for additional
improvements. The mainten- ance
subcycle sets a standard based
on prior improvements, executes,
and checks the results to make
sure that performance conforms to
the new results. If not, then corrective action is taken.

13.

Benchmarking identifies the best

practices of comparable internal
and external units. For internal
units, information can be ga- thered
that reveals how the best unit
achieves
its
results;
these
procedures can then be adopted by
other comparable units. For external
units, the performance standard
provides an incentive to find ways to
match the performance (it may
sometimes be poss- ible to
determine
the
ways
the
performance is achieved).

14.

If individuals are asked to reduce

costs and are told what the activity
driver is, they may decrease the
level of the driver below that which
is optimal. Thus, it may be
necessary to also identify the
optimal level of the cost driver so
that only nonvalue-added costs are
eliminated.

15.

The activity volume variance is a

measure of the nonvalue-added
costs. The unused ca- pacity
variance tells how much of the
commit- ted resources are not being
used. This
information
is
particularly important because it
helps managers know when they
can take actions to reduce nonvalueadded costs.

16.

Activity-based customer costing

can identify what it is costing to
service different cus- tomers. Once
known, a firm can then devise a
strategy to increase its profitability
by fo- cusing more on profitable
customers, con- verting unprofitable
customers to profitable ones where
possible, and firing customers that
cannot be made profitable.

17. Activity-based supplier costing traces

all supplier-caused activity costs to
suppliers. This new total cost may
prove to be lower than what is
signaled simply by purchase price.

EXERCISES
51
1. Plantwide rate = ($1,200,000 + $1,800,000+ $600,000)/60,000 = $60 per
Machine hour
Unit overhead cost = $60 50,000/100,000 = $30
Activity rates:
Machine rate = $1,800,000/60,000 = $30 per machine hour
Testing rate = $1,200,000/40,000 = $30 per testing hour
Rework rate = $600,000/20,000 = $30 per rework hour
Total overhead cost = ($30 50,000) + ($30
= $2,250,000

20,000) + ($30 5,000)

Unit overhead cost = $2,250,000/100,000 = $22.50

Improving the accuracy reduced the cost by $7.50, which is still less than the
$10 reduction needed. What this means is that although accuracy has a positive effect on the price, it is not the only problem. It appears that competitors
may be more efficient than Timesaver. This outcome then signals the need to
reduce costs.
2. Since testing and rework costs and setup and rework time are both reduced
by 50%, the activity rates remain the same, although the amount of cost assigned to the regular microwave will change:
Total overhead cost = ($30 50,000) + ($30 10,000) + ($30 2,500)
= $1,875,000
Unit cost = $1,875,000/100,000 = $18.75
This cost now is $11.25 less than the original allows management to reduce
the price by $10, increasing the competitive position of the regular model.
ABC is concerned with how costs are assigned, whereas ABM is not only
concerned with how they are assigned but also with how costs can be reduced. Cost accuracy and cost reduction are the dual themes of ABM.

52
Classification:
Situation
1
2
3
4
5
6
7

Activity-Based
A
A
A
B
B
B
A

FunctionalBased B
B
B
A
A
A
B

Comments:
Situation 1: In a functional-based system, individuals are held responsible for the
efficiency of organizational units, such as the Grinding Department. In an activitybased system, processes are the control points because they are the units of
change; they represent the way things are done in an organization. Improvement
and innovation mean changing the way things are done, or in other words, changing processes. Since processes, such as procurement, cut across functional
boundaries, teams are the natural outcome of process management. It is only
natural that the managers of purchasing, receiving, and accounts payable be part of
a team looking for ways to improve procurement.
Situation 2: In a functional-based responsibility system, individuals in charge of
responsibility centers are rewarded based on their ability to achieve the financial
goals of the responsibility center. Thus, meeting budget promises the fat bo- nus.
In a continuous improvement environment, process improvement is depen- dent on
team performance, so rewards tend to be group based, and gainsharing is often
used. Furthermore, there are many facets to process performance other than cost,
so the performance measures tend to be multidimensional (e.g., quality and
delivery time).

52

Concluded

Situation 3: In a functional-based system, efforts are made to encourage individuals to maximize the performance of the subunit over which they have responsibility. The concern of activity-based responsibility accounting is overall organizational performance. The focus is systemwide. It recognizes that maximizing
individual performance may not produce firmwide efficiency.
Situation 4: In a functional-based system, performance of subunits is usually
financial-based and is measured by comparing actual with budgeted outcomes. In
an activity-based system, process performance is emphasized. The objective is to
provide low-cost, high-quality products, delivered on a timely basis. Thus, both
financial and nonfinancial measures are needed.
Situation 5: In a functional-based system, budgets and standards are used to
control costs. In an activity-based responsibility system, the focus is on activities
because activities are the cause of costs. Driver analysis and activity analysis are
fundamental to the control process. Driver analysis recognizes that controlling
costs requires managers to understand the root causes. Activity analysis is the
effort expended to identify, classify, and assess the value content of all activities.
Once the value content is known, then costs can be controlled through such
means as activity reduction, activity elimination, activity sharing, and activity selection.
Situation 6: A functional-based system uses currently attainable standards that
allow for a certain amount of inefficiency. Achieving the standard is the empha- sis,
and there is no effort to improve on the standards themselves. An activity- based
approach strives for the ideal, and so the standard is the ideal. Progress is
measured over time with the expectation that performance should be continually
improving. Efforts are made to find new ways of doing things and, thus, to find new
optimal standards. The objective is to always provide incentives for positive
changes.
Situation 7: The functional-based system tends to ignore a firms activities and the
linkages of those activities with suppliers and customers. It is internally fo- cused.
An activity-based system builds in explicit recognition of those linkages and
emphasizes the importance of the value chain. Furthermore, the assessment of the
value content of activities is explicitly related to customers. What goes on outside
the firm cannot be ignored.

53
The ABM implementation is taking too long and is not producing the expected results. It also appears to not be integrated with the divisions official accounting
system, thus encouraging managers to continue relying on the old system (as
evidenced by the continued reliance on traditional materials and labor efficiency
variances). The fact that the ABC product costs are not significantly different in
many cases could be due to a lack of product diversity or perhaps due to poor
choices of pools and drivers. The lack of a competitive cost state suggests the
presence of significant nonvalue-added costs. The emphasis on the absence of
product cost differences, lack of cost reductions, and the attitude about activity
detail and the value content of inspection all reveal that plant managers have a very
limited understanding about ABM and what it can do. There clearly needs to be a
major effort to train managers to understand and use activity data. At this point,
there is no organizational culture that emphasizes the need for continuous
improvement. This need and the role ABM plays in continuous improvement
needs to be taught. The new ABM system also needs to be integrated to maximize
its chances for success.

54
1. David was concerned about meeting the schedule and staying within the 5
percent variance guideline. The first weeks production exceeded the guide- line
for both materials and labor, and he expected the same outcome for the second
week. By stopping inspections, no materials waste would be ob- served
and recorded for the second week, moving the usage variance back within the 5
percent tolerance level. Accepting all units produced also will re- duce the total
labor time reported. Finally, using inspectors as production la- bor and counting
their time as inspection labor provides some free direct labor time, which
would also contribute to the reduction or elimination of an unfavorable labor
efficiency variance. Davids behavior is unethical. David (and perhaps
others) is deliberately subverting the organizations legitimate and ethical
objective of providing a high-quality product used in the manufac- ture of an
airplane in exchange for a favorable performance rating and, pre- sumably, a
good salary increase or bonus. Although no explicit information is provided, the
stress test seems to imply an important safety role for the bolts in the airplane
structure. If true, then Davids actions become even more questionable.

54

Concluded

2. There appears to be an overreliance on standards and variances. There also

appears to be a strong internal focus David did not give much consideration
to the effect of his decision on the companys customers. The reward structure seems to be tied to the ability of David to meet or beat standards, and this
provides some incentive to engage in perverse and even unethical beha- vior.
The system certainly works against the goal of zero defects and total quality. An
activity-based system would tend to mitigate the problem because it
encourages a multidimensional performance measurement. For example,
quality measures are important. Failure to meet measures on one dimension
may be offset to some extent by good performance on other dimensions. A
strategic-based approach would mitigate the behavior even more, as it adopts a
customer focus, and performance measures relating to such things as customer satisfaction are introduced. Furthermore, more effort is made to link the
performance measures with the companys mission and strategy.
Finally, by communicating the strategy through the use of performance
measures of various perspectives, a strategic-based approach tends to align
individual goals with those of the organization. However, it should be mentioned that designing a system with perfect incentives is difficult. Ultimately, the
firm must rely on the character of its employees to carry out its objec- tives.
3. The first weeks experience indicates a fairly high defect rate between 7 and
8 percent which was expected to continue for the second week. Apparently,
item-by-item inspection is the companys way of ensuring reliable bolt performance. Abandoning the inspection process for a week simply to meet internal reporting standards seems like a weak excuse, even if a return to nor- mal
practices is expected. All too often, this sort of rationalization leads to repeated
violations of norms to meet short-term goals, and it becomes part of the culture
to the point where it doesnt appear to be wrong anymore. Fun- damentally,
the need for inspection and the high reject rate suggests that the company
needs to think about ways of improving its manufacturing process to reduce
the number of defective units. This is why an activity- or strategic- based
approach may be more suitable because they both have a process fo- cus that
emphasizes quality and efficiency. Production of defective units would not
be encouraged.

55
The following are possible sets of questions and answers (provided as examples of
what students could suggest):
Cleaning oil:
Question:
Answer:

Why is the oil puddle cleaned daily?

Because the production equipment leaks oil every day.

Question:
Answer:

Why does the production equipment leak oil?

Because a seal is damaged (root cause).

Question:
Answer:

How do we repair the damaged seal?

By replacing it.

Providing sales allowances:

Question
:
Answer:
Question
:
Answer:
Question
:
Answer:

Why are we giving sales allowances?

Because the product is not working as it should.
Why is the product not working as it should?
Usually because it has a defective
component.
Why does it have a defective component?
Because our subassembly processes occasionally
components.

produce
bad

Question:
Answer:

Why do our subassembly processes produce bad components?

Because our workers are not as well trained as they should be (root
cause).

Question:
Answer:

How do we improve the skills of our workers?

By ensuring that they all pass a rigorous training course.

10

56
Nonvalue-added:
Comparing documents
Resolving discrepancies

(state detection)
(rework)

$90,000 (0.15 $600,000)

$420,000 (0.70 $600,000)

Value-added:
Preparing checks
Mailing checks

$60,000 (0.10 $600,000)

$30,000 (0.05 $600,000)

57
Questions 26 represent a possible sequence for the activity of comparing documents, and Questions 1 and 36 represent a possible sequence for resolving
discrepancies. The two activities have a common root cause.
Question 1: Why are we resolving discrepancies?
Answer:
Because the purchase order, receiving order, and invoice have been
compared and found to be in disagreement.
Question 2: Why are documents being compared?
Answer:
Because they may not agree.
Question 3: Why would the documents not agree?
Answer:
Because one or more may be wrong.
Question 4: Why would a document be wrong?
Answer:
Because the amount received from the supplier may not correspond to
the amount ordered or because the amount billed may not corres- pond
to the amount received or both.
Question 5: Why are the amounts different?
Answer:
Because of clerical erroreither by us or by the supplier.
Question 6: How can we avoid clerical error?
Answer:
Training for our clerks will reduce the number of discrepancies; for
suppliers, extra training and care can be suggested where there is
evidence of a problem.

11

58
1. A process is a collection of activities with a common objective. The common
objective of procurement is to supply bought and paid for materials to operations (e.g., the manufacturing process). The common objective of purchasing is
to produce a request for materials from suppliers; the common objective of
receiving is to process materials from suppliers and move them to the operations area (e.g., stores or manufacturing); the common objective of paying bills
is to pay for the materials received from suppliers.
2. The effect is to reduce the demand for the activity of resolving discrepancies by
30 percent. By so doing, Whitley will save 21 percent (0.30 0.70) of its clerical
time. Thus, about four clerks can be eliminated (21% * 20 clerks = 4 clerks
eliminated) by reassigning them to other areas or simply laying them off. This
will produce savings of about $120,000 per year (4 clerks * $30,000 salary). This
is an example of process improvementan incremental increase in process
efficiency resulting in a cost reduction.

59
EDI eliminates the demand for virtually all the activities within the bill-paying
process. Some demand may be left for payment activities relative to the acquisi- tion
of nonproductive supplies. Assuming conservatively that 90 percent of the demand
is gone, then there would be a need for perhaps two clerks (10% * 20 clerks = 2
remaining clerks). This would save the company $540,000 (18 clerks *
$30,000 salary) per year for this subprocess alone. Additional savings would be
realized from reduction of demands for purchasing and receiving activities.
Switching to an EDI procurement structure is an example of process innovation.

12

510
Case

Nonvalue-Added Cost

A
B
C
D
E
F

$9 per unit
2
$300 per setup
3
$120 per unit
4
$400,000 per 5year
$250 per unit
6
$900,000 per year

Root Cause

Cost Reduction

Process design
Product design
Plant layout
Multiple*
Suppliers
Product design

Activity selection
Activity reduction
Activity
Activity selection
Activity
Activity sharing

2(0.5)$12

(0.25)$8 + (8 7.5)$10
(8

2)$50
3
4(6 0)$20
5$320,000 + (16,000)$5
6(6.5 6)$500
As given

*For example, process design, product design, and quality approach or philosophy.
511
Fixed activity rate = SP = $252,000/28,800 = $8.75 per order
Cost of unused capacity:
SP SQ
SP
$8.75 14,400
$8.75AQ
28,800
$126,000 U
Activity Volume Variance

$10,500 F

SP AU
$8.75
27,600

Unused Capacity Variance

The activity volume variance measures the nonvalue-added cost. The

unused capacity variance is a measure of the potential to reduce the
spending on an activity and, thus, reduce the nonvalue-added costs.

13

511

Concluded

2. Value-added costs = $8.75 14,400 = $126,000

Nonvalue-added costs = $8.75 14,400
$126,000

Note: For fixed activity costs, the practical capacity is currently 28,800
orders;
thus, 14,400 orders are unnecessary.
A value-added cost report would be as follows:

Purchasing

Value-Added
Costs
$126,000

Nonvalue-Added
Costs
$126,000

Actual
Costs
$252,000

Highlighting nonvalue-added costs shows managers where savings are

poss- ible and emphasizes the need for improvement. In this case, reducing
orders processed to 14,400 will create unused capacity of 14,400 orders,
allowing the company to save $126,000 in salaries.
3. First, the value-added standard is nonzero. Second, purchasing enables
other activities to be performed. Third, there is a change of state from a
state of no materials requested to a state of materials requested. Fourth, the
purchase state could not have been achieved by a prior activity. Fifth, it is a
necessary activity one essential for the firm to remain in business.
Possible reasons for exceeding the value-added standard: suboptimal inventory management policies, reorders due to bad parts being delivered by suppliers, extra orders due to rework requirements, and additional orders because the wrong types and quantities of materials were ordered.
4. By reducing the demand by another 6,000 units, the unused capacity will
now equal 7,200 orders an amount equivalent to 1.5 purchasing agents.
Thus, the number of purchasing agents can be reduced from 6 to 5, saving
$42,000.

14

512
1.

Willson Company
Value- and Nonvalue-Added Cost Report
For the Year Ended December 31, 2005
Value-Added

Actual

Costs
$
630,000
2,394,0
00
2,838,0
00
1,125,00
$6,987,0
00
2. Inspecting parts is nonvalue-added (SQ = 0 is a necessary condition for a
nonvalue-added activity). Inspection is nonvalue-added because it is a statedetection activity, not a state-changing activity. It also is not essential to ena- ble
other activities to be performed. Value-added activities can engender nonvalueadded costs if they are not performed efficiently.

Purchasing parts
Assembling parts
Administering parts
Inspecting parts
Total

Costs
$ 450,000
2,160,000
1,980,000
0
$4,590,000

Nonvalue-Added
Costs
$ 180,000
234,000
858,000
1,125,000
$2,397,000

513
1.

Willson Company
Nonvalue-Added Cost Trend Report
For the Year Ended December 31, 2006
Change
$ 90,000
F162,000
F
198,000
F
450,000
F
$900,000
F
Note: The above amounts were computed for each year, using the following
formula: (AQ SQ)SP.

Purchasing parts
Assembling parts
Administering parts
Inspecting parts
Total

2005
$ 180,000
234,000
858,000
1,125,000
$2,397,000

2006
90,000
72,000
660,000
675,000
$1,497,000
$

2. A trend report allows managers to assess the effectiveness of activity management. It is a critical document that reveals the success of continuous
improvement efforts. It also provides some information about additional opportunity for improvement. In 2006, activity management reduced the
nonvalue-added costs by $900,000, signaling that the actions taken were
good. It also shows that additional opportunity for reduction exists more effort is needed to reduce the $1,497,000 of remaining nonvalue-added costs.

15

514
1. Activity and driver analysis:
Setting up equipment: This is a value-added activity because (1) it causes a
change in the state of nature: improperly configured equipment to properly
configured equipment, (2) there is no prior activity that could have caused the
state change, and (3) it is necessary to enable other activities to be performed. However, setting up equipment often takes more time than needed and
so this activity has a nonvalue-added component. Most companies strive for
zero setup time. Thus, the time and associated cost are nonvalue-added
because the activity is performed inefficiently. Means should be explored to
reduce the time of this activity so that it consumes fewer resources. Possible
root causes include such factors as product design, process design, and
equipment design. Knowing the root causes can lead to an improvement in
activity efficiency. Moving from a departmental manufacturing structure to a
cellular manufacturing structure in some cases may eliminate the need for setups, thus eliminating the activity, or flexible manufacturing equipment might be
purchased that provides an almost instantaneous setup capability (a
change in process technology and certainly a change in equipment design).
In other cases, the activity may be improved by redesigning the product so that
a less complicated setup is required.
Creating scrap: This is generally viewed as a nonvalue-added activity and
should be eliminated. It is nonvalue-added because it causes a nondesired
change of state and because it does not enable other value-added activities to
be performed. Efforts should be made to find ways of producing that elimi- nate
scrap. Possible root causes include poor vendor quality, quality man- agement
approach, and manufacturing process used. Knowing the root caus- es may
lead to a supplier valuation program that improves the quality of the parts and
materials purchased externally, adoption of a total quality manage- ment
program, and perhaps the use of automated equipment to cut down on material
waste (because of greater precision).
Welding subassemblies: This is a value-added activity. It causes a desired state
change that could not have been done by preceding activities and enables
other activities to be performed. If inefficient, then means should be sought to
improve efficiency. The goal is to optimize value-added activity per- formance.
Possible root causes include product design, process design, and production
technology. Changing either of the two designs could decrease the demand for
the welding activity while producing the same or more output. A change in
technology buying more advanced technology, for example may also
increase the efficiency of the activity.

16

514

Continued

Materials handling: This is a nonvalue-added activity. Moving materials and

subassemblies from one point in the plant changes location but not the state.
But it does enable other activities to be performed, and it is not a repeated action. If you argue that changing location is a change in state, then moving materials is value-added but with the potential of significant increases in efficiency (as with setups, the goal is to minimize the amount of activity performance).
Possible root causes include plant layout, manufacturing processes, and vendor arrangements. Moving from a departmental to a cellular structure, adopting
computer-aided manufacturing, and entering into contracts with suppliers that
require just-in-time delivery to the point of production are examples of how
knowledge of root causes can be exploited to reduce and eliminate nonvalueadded activities.
Inspecting parts: Inspection is a nonvalue-added activity. It is a statedetection activity and is not necessary to enable other activities to be performed. This activity should be reduced and eventually eliminated. A possible
root cause of inspection is the possibility of poor quality of parts and materials. The company should work with suppliers to ensure high quality (zerodefect parts).
2. Behavioral analysis:
Setting up equipment: Using the number of setups as a driver may cause a
buildup of inventories. Since reducing the number of setups will reduce setup
costs, there will be an incentive to have fewer setups. Reducing the number of
setups will result in larger lots and could create finished goods inventory. This
is in opposition to the goal of zero inventories. On the other hand, if se- tup time
is used as the driver, managers will have an incentive to reduce se- tup time.
Reducing setup time allows managers to produce on demand rather than for
inventory.

17

514

Concluded

Creating scrap: Using the number of defective units as a driver should encourage managers to reduce defective units. Assuming that defective units are
the source of scrap, this should reduce scrap costs. Similarly, using
pounds of scrap should encourage managers to find ways to reduce scrap. In
both cases, the behavioral consequences could be two-edged. If the reduc- tion
of scrap (defective units) is achieved by increasing quality/productive efficiency, the effect is compatible with the objective of creating a competitive
advantage. If the reduction is achieved by allowing defective units to flow
through to finished goods, then the effect will be to alienate customers, not win
their favor (customer realization decreases). Neither driver appears to dominate.
One solution is to report the trend in warranty activity with the trend in scrap
activity. This may discourage any kind of pass-on behavior.
Welding subassemblies: Using welding hours should encourage management to
find ways of reducing the welding hours required per product. This would be
more likely to induce managers to look at possible root causes such as product
design and process design rather than number of welded subassem- blies.
There is some value in looking for ways to reduce the number of welded
subassemblies, perhaps redesigning the product to eliminate welding.
Materials handling: Both drivers seem to have positive incentives. Seeking ways
to reduce the number of moves or distance moved should lead manag- ers to
look at root causes. Reorganizing the plant layout, for example, should reduce
either the number of moves or the distance moved. Hopefully, the ac- tivity
drivers will lead to the identification of executional drivers that can be managed
so that the activity can be reduced and eventually eliminated.
Inspecting parts: Hours of inspection can be reduced by working with suppliers so that greater incoming quality is ensured. Similarly, the number of defective parts can be reduced by working with suppliers so that incoming quality is increased. Hours of inspection, however, can be reduced without
increasing quality. This is not true for the number of defective parts. Using the
number of defective parts appears to be a better choice.

18

515
1. First quarter: Setup time standard = 10 hours (based on the planned improvement: 15 hours 5 hours)
Second quarter: Setup time standard = 8 hours (based on the planned improvement: 9 hours 1 hour)
2. Kaizen subcycle:
Plan (five-hour reduction from process redesign)
Do (try out setup with new design)
Check (time required was nine hours, a six-hour reduction)
Act (lock in six-hour improvement by setting new standard of nine hours and
using same procedures as used to give the nine-hour outcome; and,
simultaneously, search for new improvement opportunity; in this case, the
suggested changes of the production workers.)
Repeat kaizen subcycle:
Plan (one-hour reduction from setup procedure changes)
Do (train and then implement procedures)
Check (actual time required was 6.5 hours, a 2.5-hour reduction)
Act (lock in improvement by setting standard of 6.5 hours and begin search
for new improvement)
3. Maintenance subcycle:
First quarter (end of):
Establish standard (nine hours based on improved process design)
Do (implement repetitively the improved standard)
Check (see if the nine-hour time is maintained)
Act (if the nine-hour time deteriorates, find out why and take corrective action to restore to seven hours.)
Second quarter: Same cycle using 6.5 hours as the new standard to maintain
Note: The maintenance cycle described begins after observing the actual improvement. The actual improvement is locked in. The maintenance standard at
the beginning of the first quarter is 15 hours.

19

515

Concluded

4. Nonvalue-added cost saved (eliminated): $100 8.5 = $850 per setup.

5. Standard costing basically uses only a maintenance subcycle. Standards are
set and maintained. The principal difference is the emphasis on constantly
searching for improvements with the standard changing with each improvement. This search involves all employees (e.g., engineers and production
workers). Thus, kaizen costing is dynamic, whereas traditional (functionalbased) standard costing is static.

516
1.

JIT
Non-JIT
a
Sales
$25,000,000
$25,000,00
b
1,500,000
1,500,00
Allocation
0
a
$125 200,000, where $125 = $100 cost + ($100 0.25) markup on cost, and
200,000 is the average order size times the number of orders

JIT : 400 orders * 500 average order size = 200,000

Non-JIT:
40 orders * 5,000 average order size = 200,000
b
0.50 $3,000,000
2. Activity rates:
Ordering rate = $1,760,000/440= $4,000 per sales
order Selling rate
= $640,000/80 = $8,000
per sales call Service rate
= $600,000/300 = $2,000
per service call

20

516

Concluded
JIT

Ordering costs:
$4,000 400
$4,000 40

$ 1,600,000
$ 160,000

Selling costs:
$8,000 40
$8,000 40

320,000

Service costs:
$2,000 200
$2,000 100

400,000

Total

Non-JIT

320,000

200,000
$ 2,320,000

$ 680,000

For the non-JIT customers, the customer costs amount to $1,500,000/40 =

$37,500 per order under the original allocation. Using activity assignments,
this drops to $680,000/40 = $17,000 per order, a difference of $20,500 per order. For an order of 5,000 units, the order price can be decreased by $4.10
per unit without affecting customer profitability. Overall profitability will
decrease, however, unless the price for orders is increased to JIT customers.
3. It sounds like the JIT buyers are switching their inventory carrying costs to
Carbon without any significant benefit to Carbon. Carbon needs to increase
prices to reflect the additional demands on customer-support activities. Furthermore, additional price increases may be needed to reflect the increased
number of setups, purchases, and so on, that are likely occurring inside the
plant. Carbon should also immediately initiate discussions with its JIT customers to begin negotiations for achieving some of the benefits that a JIT
supplier should have, such as long-term contracts. The benefits of long-term
contracting may offset most or all of the increased costs from the additional
demands made on other activities.

21

517
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers:
Inspecting components: $240,000/2,000 = $120 per sampling
hour Reworking products: $760,500/1,500 = $507 per rework
hour Warranty work: $4,800,000/8,000 = $600 per warranty hour
Next, calculate the cost per component by supplier:
Supplier cost:

Vance

Purchase cost:
$23.50 400,000
9,400,000
$21.50
$34,400,000

Warranty work:
$600
240,000
$600
4,560,000
Total supplier cost
$39,910,070
Units supplied
Unit cost
24.94*

1,600,000

Inspecting components:
$120

4,800
$120
235,200
Reworking products:
$507
45,630
$507
714,870

Foy

40
1,960

90

1,410

400

7,600

$ 9,690,430
400,000
$

1,600,000
24.23*
$

*Rounded
The difference is in favor of Vance; however, when the price concession is
considered, the cost of Vance is $23.23, which is less than Foys component.
Lumus should accept the contractual offer made by Vance.

517

Concluded

2. Warranty hours would act as the best driver of the three choices. Using this
driver, the rate is $1,000,000/8,000 = $125 per warranty hour. The cost assigned to each component would be:
Vance
Lost sales:
$125 400
$125 7,600

Units supplied
Increase in unit cost
*Rounded

Foy

$ 50,000
$ 50,000
400,000
$
0.13*

$ 950,000
$ 950,000
1,600,000
$
0.59*

PROBLEMS
518
1. An activity driver measures the amount of an activity consumed by a cost
ob- ject. It is a measure of activity output. Activity drivers are used to assign
ac- tivity costs to cost objects. On the other hand, a cost driver is the root
cause of the activity and explains why the activity is performed. Cost drivers
are useful for identifying how costs can be reduced (rather than assigned).
2. Value content and driver analysis:
Setting up equipment: At first glance, this appears to be a value-added activity because: (1) it causes a change in the state of nature: improperly configured equipment to properly configured equipment, (2) there is no prior
activ- ity that should have caused the state change, and (3) it is necessary to
enable other activities to be performed. However, setting up equipment often
takes more time than needed and so has a nonvalue-added component. Most
com- panies strive for zero setup time, suggesting that the time and
associated cost are nonvalue-added because the activity is performed
inefficiently. (A ze- ro setup time suggests a nonvalue-added activity.) Means
should be explored to reduce the time of this activity so that it consumes
fewer resources. Possi- ble root causes include such factors as product
design, process design, and equipment design. Knowing the root causes can
lead to an improvement in activity efficiency. Moving from a departmental
manufacturing structure to a cellular manufacturing structure in some cases
may eliminate the need for se- tups, thus eliminating the activity. Or flexible
manufacturing equipment might be purchased that provides an almost
instantaneous setup capability (a change in process technology and
certainly a change in equipment design). In other cases, the activity may be
improved by redesigning the product so that a less complicated setup is
required.
Performing warranty work: This is generally viewed as a nonvalue-added activity and should be eliminated. It is nonvalue-added because it represents a
type of reworkrepairs on products that are caused by faulty production.
Possible root causes include poor vendor quality, poor product design,
quali- ty management approach, and manufacturing process used.
Knowing the root causes may lead to a supplier valuation program that
improves the quali- ty of the parts and materials purchased externally,
adoption of a total quality management program, product redesign, process
redesign, and perhaps the use of automated equipment to cut down on faulty
products.
24

518

Continued

Welding subassemblies: This is a value-added activity. It causes a desired

state change that could not have been done by preceding activities
and enables other activities to be performed. If inefficient, then means
should be sought to improve efficiency. The goal is to optimize value-added
activity per- formance. Possible root causes of inefficiency include
product design, process design, and production technology. Changing
either product or process design could decrease the demand for the welding
activity while producing the same or more output. A change in technology
buying more advanced technology, for example may also increase the
efficiency of the activity.
Moving materials: This is usually viewed as a nonvalue-added activity. Moving materials and subassemblies from one point in the plant changes
location but not the state. But it does enable other activities to be performed,
and it is not a repeated action. If it is argued that changing location is a
change in state, then you could respond by noting that it is an unnecessary
change of state. Possible root causes include plant layout, manufacturing
processes, and vendor arrangements. Moving from a departmental to a
cellular structure, adopting computer-aided manufacturing, and entering into
contracts with suppliers that require just-in-time delivery to the point of
production are ex- amples of how knowledge of root causes can be exploited
to reduce and elim- inate material handling cost.
Inspecting components: Inspection is a nonvalue-added activity. It is a statedetection activity and is not necessary to enable other activities to be performed. This activity should be reduced and eventually eliminated. A
possible root cause of inspection is the possibility of poor quality of parts
and mate- rials. The company should work with suppliers to ensure high
quality (zero- defect parts).

25

518

Concluded

3. Behavioral analysis:
Setting up equipment: Using the number of setups as a driver may cause a
buildup of inventories. Since reducing the number of setups will reduce
setup costs, there will be an incentive to have fewer setups. Reducing the
number of setups will result in larger lots and could create finished goods
inventory. This is in opposition to the goal of zero inventories. On the other
hand, if se- tup time is used as the driver, managers will have an incentive to
reduce se- tup time. Reducing setup time allows managers to produce on
demand rather than for inventory.
Performing warranty work: Using the number of defective units as a driver
should encourage managers to reduce defective units. Assuming that defective units are the source of warranty work, this should reduce warranty
costs. Similarly, using warranty hours could encourage managers to find
ways to reduce warranty work by decreasing its causes. Alternatively, it may
cause them to look for more efficient means of performing warranty work.
Increas- ing the efficiency of a nonvalue-added activity has some short-run
merit but it should not be the focus. Of the two drivers, defective units is the
most com- patible with eventual elimination of the nonvalue-added activity.
Welding subassemblies: Using welding hours should encourage
management to find ways of reducing the welding hours required per
product. This would more likely induce managers to look at possible root
causes such as product design and process design than would number of
welded subassemblies. There is some value in looking for ways to reduce
the number of welded sub- assemblies, perhaps redesigning the product to
eliminate welding.
Moving materials: Both drivers seem to have positive incentives.
Seeking ways to reduce the number of moves or distance moved should lead
manag- ers to look at root causes. Reorganizing the plant layout, for
example, should reduce either the number of moves or the distance moved.
Hopefully, the ac- tivity drivers will lead to the identification of executional
drivers that can be managed so that the activity can be reduced and
eventually eliminated.
Inspecting components: Hours of inspection can be reduced by working with
suppliers so that greater incoming quality is ensured. Similarly, the number
of defective parts can be reduced by working with suppliers so that incoming
quality is increased. Hours of inspection, however, can be reduced without
increasing quality. This is not true for the number of defective parts. Using
the number of defective parts appears to be a better choice.

26

519
1. Activity-based management is a systemwide, integrated approach that
focus- es managements attention on activities. It involves two dimensions:
a cost dimension and a process dimension. A key element in activity
management is identifying activities, assessing their value, and retaining
only value-adding activities. The consultant identified the activities but did
not formally classify the activities as value-added or nonvalue-added. Nor
did the consultant offer any suggestions for increasing efficiency at least
not formally. The consul- tant apparently had tentatively identified savings
possible by eliminating nonvalue-added activities. Management must still
decide how to reduce, elim- inate, share, and select activities to achieve cost
reductions.
2.

Setup
Materials handling
Inspection
Customer complaints
Warranties
Storing
Expediting
Total
Units produced and sold

$125,0
00
180,0
00
122,0
00
100,0
00
170,0
00
80,0
00
75,000
$852,0
00
120,000*

Potential unit cost reduction

7.10

*$1,920,000/$16 (total cost divided by unit cost)

The consultants estimate of cost reduction was on target. Per-unit costs can be
reduced by at least $7, and further reductions may be possible if improvements in value-added activities are possible.
3. Total potential reduction:
$ 852,000 (from Requirement 2)
150,000 (by automating)
$1,002,000
Units
120,000
Unit savings
$
8.35
Costs can be reduced by at least $7, enabling the company to maintain cur- rent
market share. Further, if all the nonvalue-added costs are eliminated, then the
cost reduction needed to increase market share is also possible. Ac- tivity
selection is the form of activity management used here.

27

4. Current:
Sales
Costs
Income

$ 2,160,000 ($18 120,000 units)

(1,920,000)
$ 240,000

$14 price (assumes that current market share is maintained):

Sales
Costs
Income

$1,680,000 ($14 120,000 units)

(918,000) ($7.65* 120,000 units)
$ 762,000

$12 price:
Sales
Costs
Income

$ 2,160,000 ($12 180,000 units)

(1,377,000) ($7.65* 180,000 units)
$ 783,000

*$16 $8.35 = $7.65

The $12 price produces the greatest benefit.

28

520
1. Nonvalue-added usage and costs, 2008:
Nonvalue-AddedNonvalue-Added
Usage
Cost

(AQ SQ)SP
$
600,000
$1,204,8
00
*1.25 6 80,000; (4 6,000) + (10 2,400) (AQ for engineering represents
the actual practical capacity acquired.)

Materials
Engineering

AQ*
600,000
48,000

SQ**
480,000
27,840

AQ SQ
120,000
20,160

**6 80,000; (0.58 24,000) + (0.58 24,000)

Note: SP for materials is $5; SP for engineering is $30 ($1,440,000/48,000).
There are no price variances because SP = AP.
Unused capacity for engineering:
SP AQ

SP
AU

$30 48,000

$30
46,000
$60,0
00 F

Unused Capacity
Variance

2. Kaizen standards for the coming year (2009):

Materials:
SQ = 480,000 + 0.6(120,000) = 552,000 pounds
Engineering: SQ = 27,840 + 0.6(20,160) = 39,936 engineering hours

29

520
3.

Concluded
AQ*
584,800
35,400

SQ
552,000
39,936

AQ
SQ
32,80
(4,536)

SP(AQ
SQ)
Materials
$164,000
Engineering
136,080
F
*For engineering, the kaizen standard is a measure of how much resource
usage is needed (this year), and so progress is measured by comparing SQ
with actual usage, AU, not AQ, activity availability. The formula AQ AU, on the
other hand, will measure the unused capacity, a useful number, as is discussed below.
The company failed to meet the materials kaizen standard but beat the engineering standard. The engineering outcome is of particular interest. The ac- tual
usage of the engineering resource is 35,400 hours, and activity availa- bility is
48,000. Thus, the company has created 12,600 hours of unused engineering
capacity. Each engineer brings a capacity of 2,000 hours. Since engineers come
in whole units, the company now has six too many! Thus, to realize the savings
for the engineering activity, the company must decide how to best use these
available resources. One possibility is to simply lay off six engineers, thereby
increasing total profits by the salaries saved ($360,000). Other possibilities
include reassignment to activities that have insufficient re- sources (assuming
they could use engineers, e.g., perhaps new product de- velopment could use
six engineers). The critical point is that resource usage reductions must be
converted into reductions in resource spending, or the ef- forts have been in
vain.

30

521
1.

Nonvalue-added costs:
Materials (400,000 380,000)$21
Labor (96,000 91,200)$12.50
Setups (6,400 0)$75
Materials handling (16,000 0)$70
Warranties (16,000 0)$100
Total
Units produced and sold
Unit nonvalue-added cost

$
60,0
00
480,0
00
1,120,0
00
1,600,000
$
3,680,000

Current cost less nonvalue-added

cost:
$640 $184 = $456
This is much less than the Santa Clara plants cost of $560. Thus, matching the
Santa Clara cost is possible and so is the target cost for expanding mar- ket
share. How quickly the cost reductions can be achieved is another matter. Since
the Santa Clara plant has experience in achieving reductions, it may be possible
to achieve at least a cost of $560 within a reasonably short time. As plant
manager, I would borrow heavily from the Santa Clara plant experience and
attempt to reduce the nonvalue-added costs quickly. I would also lower the
price to $624 and seek to take advantage of the increased market share even
if it meant a short-term reduction in profits.
2. Benchmarking played a major role. The Santa Clara plant set the standard and
offered to share information on how it achieved the cost reductions that
enabled it to lower its selling price. The Lincoln plant responded by accepting
the offer of help and taking actions to achieve the same or greater cost reductions.

31

522
1. First quarter:

Setup time standard = 8 hours (based on the planned improvement: 12 hours 4 hours of reduced time)
Second quarter: Setup time standard = 4 hours (based on the planned improvement: 9 hours 5 hours)

2. Kaizen subcycle:

Plan (4-hour reduction from process redesign.)

Do (Try out setup with new design.)
Check (Time required was 9 hours, a 3-hour reduction.)
Act (Lock in 3-hour improvement by setting new standard of 9 hours and
using same procedures as used to give the 9-hour outcome; simultaneously, search for new improvement opportunityin this case, the suggested changes of the production workers.)

Repeat Kaizen subcycle:

Plan (5-hours reduction from setup procedure changes.)

Do (Train and then implement procedures.)
Check (Actual time required was 3 hours, a 6-hour reduction.)
Act (Lock in improvement by setting standard of 3 hours and begin search
for new improvement.)

3. Maintenance subcycle:
First quarter:

Establish standard (9 hours based on improved process design.)

Do (Implement repetitively the improved standard.)
Check (See if the 9-hour time is maintained.)
Act (If the 9-hour time deteriorates, find out why and take corrective action to
restore to 9 hours.)

Second quarter: Same cycle using 3 hours as the new standard to maintain.
Note: The maintenance cycle begins after observing the actual improvement.
The actual improvement is locked in.

32

522

Concluded

4. Nonvalue-added cost saved (eliminated): $300 6 hours savings = $1,800 per

setup. Kaizen costing is concerned with improving activity performance and
uses root causes to help identify initiatives for improvement. Thus, kaizen is a
tool or means for implementing ABM concepts.
5. Kaizen costing emphasizes constantly searching for process improvements
with the standard changing with each improvement. This search involves all
employees (e.g., engineers and production workers). Thus, kaizen costing focuses on processes and uses dynamic standards, which are characteristics of
activity-based responsibility accounting. Standard costing uses only the
maintenance subcycle. Standards are set and maintainedthey are static in
nature and thus consistent with the financial-based responsibility accounting
model.

523
1. Cost per account = $4,070,000/50,000 = $81.40
Average fee per month = $81.40/12 = $6.78*
*Rounded
2. Activity rates:
Opening and closing accounts: $200,000/20,000 = $10 per account
Issuing monthly statements: $300,000/600,000 = $0.50 per statement
Processing transactions: $2,050,000/20,500,000 = $0.10 per transaction
Customer inquiries: $400,000/2,000,000 = $0.20 per minute
Providing ATM services: $1,120,000/1,600,000 = $0.70 per transaction

33

523 Continued
3. Costs assigned:
Opening and closing:
$10 15,000
$10 3,000
$10 2,000
Issuing monthly statements:
$0.50 450,000
$0.50 100,000
$0.50 50,000
Processing transactions:
$0.10 18,000,000
$0.10 2,000,000
$0.10 500,000
Customer inquiries:
$0.20 1,000,000
$0.20 600,000
$0.20 400,000
Providing ATM services:
$0.70 1,350,000
$0.70 200,000
$0.70 50,000
Total cost
Number of accounts
Cost per account

Low

Medium

$ 150,000
$ 30,000
$ 20,000
225,000
50,000
25,0
00
1,800,000
200,000
50,0
00
200,000
120,000
80,0
00
945,000
140,000
$ 3,320,000

38,000
$
87.37

$540,000
8,000
$ 67.50

Average profit per account: $90.00 $81.40 = $8.60

ABC profit measure:
Low-balance customers:
$80 $87.37 = $(7.37)
Medium-balance customers: $100 $67.50 = $32.50
High-balance customers:
$165 $52.50 = $112.50

34

High

35,000
$210,0
00

4,000

523

Concluded

4. First, calculate the profits from loans, credit cards, and other products by
customer category (using ABC data). Next, compare 50 percent of the
cross sales profits from low-balance customers with the total loss from the
low- balance checking accounts. If the cross sales profits are greater than
the loss, the presidents argument has merit.

524
1. GAAP mandates that all nonmanufacturing costs be expensed during the
pe- riod in which they are incurred. GAAP are the most likely cause of the
prac- tice. The limitations of GAAP-produced information for cost
management should be emphasized.
2. The total product consists of all benefits, both tangible and intangible, that
a customer receives. One of the benefits is the order-filling service
provided by Sorensen. Thus, it can be argued that these costs should be
product costs and not assigning them to products undercosts all
products. From the infor- mation given, there are more small orders than
large (50,000 orders averaging
600 units per order); thus, these small orders consume more of the orderfilling resources. They should, therefore, receive more of the orderfilling costs.
The average order-filling cost per unit produced is computed as
follows:
1

$4,500,000/90,000,0001 units = $0.05 per unit

(50,000 orders * 600 units per order) + (30,000 orders * 1,000 units per
order) + (20,000 orders * 1,500 units per order) = 90,000,000 units

Thus, order-filling costs are about 6 to 10 percent of the selling price,

clearly not a trivial amount.
Furthermore, the per-unit cost for individual product families can be
com- puted using the number of orders as the activity driver:
Activity rate
orders

= $4,500,000/100,000
= $45 per
order

The per-unit ordering cost for each product family can now be
calculated: Category I: $45/600 = $0.075 per unit
Category II: $45/1,000 = $0.045 per unit
Category III: $45/1,500 = $0.03 per unit
Category I, which has the smallest batches, is the most undercosted of
the three categories. Furthermore, the unit ordering cost is quite high

relative to
5-24

Concluded

Category Is selling price (9 to 15 percent of the selling price). This

suggests that something should be done to reduce the order-filling
costs.
3. With the pricing incentive feature, the average order size has been
increased to 2,000 units for all three product families. The number of
orders now processed can be calculated as follows:
Orders = [(600 50,000) + (1,000 30,000) + (1,500 20,000)]/2,000
= 45,000
Reduction in orders = 100,000 45,000 = 55,000
Steps that can be reduced = 55,000/2,000 = 27 (rounding down to
nearest whole number)
There were initially 50 steps: 100,000/2,000
Reduction in resource spending:
Step-fixed costs:
Variable activity costs:

$50,000 27 = $1,350,000
$20 55,000 = 1,100,000
$2,450,000

Customers were placing smaller and more frequent orders than

necessary. They were receiving a benefit without being charged for it.
By charging for the benefit and allowing customers to decide whether
the benefit is worth the cost of providing it, Sorensen was able to
reduce its costs (potentially by shifting the cost of the service to the
customers). The customers, however, apparently did not feel that the
benefit was worth paying for and so increased order size. By increasing
order size, the number of orders decreased, de- creasing the demand
for the order-filling activity, allowing Sorensen to reduce its order-filling
costs. Other benefits may also be realized. The order size af- fects
activities such as scheduling, setups, and material handling. Larger orders should also decrease the demand for these activities, and costs
can be reduced even more.
Competitive advantage is created by providing the same customer
value for less cost or better value for the same or less cost. By
reducing the cost, So- rensen can increase customer value by
providing a lower price (decreasing customer sacrifice) or by providing
some extra product features without in- creasing the price (increasing
customer realization, holding customer sacri- fice constant). This is
made possible by the decreased cost of producing and selling the
bolts.

525
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers:
Replacing engines:
$3,200,000/4,00 = $800 per engine
0 $4,000,000/40 = $10,000 per late
Expediting orders:
0
shipment
Repairing engines:
$7,200,000/5,00
=
$1,440 per engine
0
Next, calculate the cost per engine by supplier:
Supplier cost:
Purchase
cost:
$900
$64,800,000
$1,000
$16,000,000

Replacing
engines:
$800
3,168,000
$800
32,000

Watson

Johnson

72,000

16,000

3,960

Expediting
orders:
$10,000
3,960,000
$10,000
40,000
Repairing
engines:
$1,440

7,027,200
$1,440
172,800
Total supplier cost
$16,244,800
Units supplied
16,000
Unit cost
1,015.30

40

396

4,880
120

$78,955,200

72,000

1,096.60

The Johnson engine costs less when the full supplier effects are
considered. This is a better assessment of cost because it considers

the costs that are caused by the supplier due to poor quality, poor
reliability, and poor delivery performance.
2. In the short run, buy 40,000 from Johnson and 48,000 from Watson. In
the long run, one possibility is to encourage Johnson to expand its
capacity; another possibility is to encourage Watson to increase its
quality and main- tain purchases from both sources.

MANAGERIAL DECISION CASE

526
1. Tim and Jimmy have been friends for a long time. The one-time nature
of the request and the alleged effect a redesign would have on Jimmys
career op- portunity both create strong pressure for Tim to provide the
requested coop- eration. Of course, even without any specific ethical
standards, it is fairly easy to see that falsification of reports to help
ensure a promotion is not the right thing to do. Tim should turn down
the request and make every effort to help Jimmy find a solution that will
benefit him and the company. For exam- ple, Tim might be able to use
his influence to obtain extra development capi- tal, including a
sufficient amount to expedite the development so that the production
dates can still be met.
2. If Tim cooperates, he will violate (at least) the following ethical
standards (see Chapter 1): competence standard I-3 (Provide decision
support information and recommendations that are accurate, clear,
concise, and timely); integrity standards III-1 and III-2: and credibility
standards IV-1 and IV-2.
3. Tim should follow any relevant organizational policies bearing on
matters such as these. If these policies do not apply, then he should
discuss the problem with his supervisor (the divisional manager). If
satisfactory reso- lution is not obtained here, then the issues should
be submitted to the next higher management level. Certainly, the
actions described here would place Tim in an awkward position. Even
though he has not willingly cooperated, a passive reaction could later
be construed as implicit involvement. Thus, some action such as that
outlined is strongly recommended.

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