ADV Cost 11&12
Explain how activity-based management is a form of responsibility accounting, and tell how it differs from financial-based responsibility accounting.
A firm can adopt one of three responsibility accounting systems.Two are discussed in this chapter: financial-based responsibility accounting and activitybased responsibility accounting.Financial-based responsibility accounting focuses on organizational units such as departments and plants; uses financial outcome measures, static standards, and benchmarks to evaluate performance; and emphasizes status quo and organizational stability.Activity-based responsibility accounting focuses on processes, uses both operational and financial measures, employs dynamic standards, and emphasizes and supports continuous improvement.
Describe how activity-based management and activity-based costing differ.
Activity-based management encompasses both activity-based costing and process value analysis.Activity-based costing is concerned with accurate assignment of costs to cost objects and is an important source of information for managing activities. ABC, however, is not concerned with the issue or presence of waste in activities.Identifying waste and its causes and eliminating it fall within the domain of process value analysis.
Discuss the implementation issues associated with an activity-based management system.
Implementing an activity-based management system requires careful planning and execution.The objectives of the system must be identified and explained.The benefits of the system and the anticipated effects should also be noted.A key issue is assessing and managing the ability of the organization to implement, learn, and use the new activity information. Strong support from higher management is critical for this process.
Describe the effect JIT has on cost traceability and product costing.
In a JIT environment, many overhead costs assigned to products using either driver tracing or allocation are now directly traceable to products.A vastly simplified process-costing system is the usual structure for a JIT environment.Product costing is more accurate because of increased traceability of costs.Accounting for the cost accounting cycle is simplified using backflush costing.
Identify the basic features of JIT purchasing and manufacturing.
JIT purchasing and manufacturing offer a totally different set of structural and procedural activities from those of the traditional organization.In JIT purchasing, parts and materials arrive just in time to be used in production. JIT assumes that all costs other than direct materials are driven by time and space drivers.Understanding supplier and customer linkages is vital for a successful JIT system.
Discuss value-chain analysis and the strategic role of activity-based customer and supplier costing.
Knowledge of organizational and operational activities and their associated cost drivers is fundamental to strategic cost analysis. Knowledge of the firm's value chain and the industrial value chain is also critical.Value-chain analysis relies on identifying and exploiting internal and external linkages.Good cost management of supplier and customer linkages requires an understanding of what suppliers cost and how much it costs to service customers.Activity-based assignments to suppliers and customers provide the accurate cost information needed.
Tell what life-cycle cost management is and how it can be used to maximize profits over a product's life cycle.
Life-cycle cost management is related to strategic cost analysis and, in fact, could be called a type of strategic cost analysis.Life-cycle cost management requires an understanding of the three types of life-cycle viewpoints: the marketing viewpoint, the production viewpoint, and the consumable life viewpoint.Target costing plays an essential role in life-cycle cost management by providing a methodology for reducing costs in the design stage by considering and exploiting both customer and supplier linkages.
Explain what strategic cost management is and how it can be used to help a firm create a competitive advantage.
Obtaining a competitive advantage so that long-term survival is ensured is the goal of strategic cost management.Different strategies create different bundles of activities. By assigning costs to activities, the costs of different strategies can be assessed.There are three generic or general strategies: cost leadership, differentiation, and focusing.The particular mix and relative emphasis of these three strategies define a firm's strategic position.The objective of strategic cost management is to reduce costs while simultaneously strengthening a firm's strategic position.
Define process value analysis.
Process value analysis emphasizes activity management with the intent of maximizing systemwide performance. It consists of three elements: driver analysis, activity analysis, and performance measurement.Driver analysis is also referred to as root cause analysis. It seeks to identify why activities are performed.Activity analysis identifies all activities and the resources they consume and classifies activities as value-added or non-value-added.Performance measurement is concerned with how well activities are performed.
Describe activity-based financial performance measurement.
Reporting value- and non-value-added costs is an integral part of a sound activity-based management system. Tracking trends in these costs over time is an effective control measure.Once management determines the source of non-value-added costs, a focused program of continuous improvement can be implemented.Kaizen costing is a well-accepted approach for reducing costs by eliminating waste.Activity flexible budgeting and activity capacity management offer additional control capabilities.Activity flexible budgeting differs from the traditional approach by using more than unitlevel drivers to predict what costs will be at different levels of activity output.Activity capacity management involves identification of the volume variance (nonvalue-added cost) and the unused capacity variance (progress toward reducing nonvalue-added cost).
