Cost Management 2nd edition, Ch 07 - Activity-Based Costing & Management

What are the applications of ABM?

* Customer profitability. * Product and process design (IE - focus resources on value-added activities, reduce/eliminate non-value-added activities, target and kaizen costing) * Environmental costs * Quality (IE - prevention activities, appraisal activities, production activities, post-sales activities)

What are 3 alternative allocation rates?

* Past Cost Rate: use past costs and past volumes. * Estimated Rate: use estimated costs and estimated volumes. * Supply-Based Rate: use estimated costs and practical capacity.

What should you look for when selecting cost drivers in an ABC system?

1. Cause and effect relationship between cost driver and activity costs. 2. Judgment in choosing and evaluating potential cost drivers.

What is the process used to assign costs in an ABC system?

1. Identify the relevant cost object. 2. Identify activities. 3. Assign (trace and allocate) costs to activity-based cost pools. 4. For each ABC cost pool, choose a cost driver. 5. For each ABC cost pool, calculate an allocation rate. (Allocation rate = Activity cost / Volume of cost driver) 6. For each ABC cost pool, allocate activity costs to the cost object. (Allocation = Allocation rate * Actual volume of activity)

What is the cost hierarchy for activities?

1. Organization-sustaining activities 2. Facility-sustaining activities 3. Customer-sustaining activities 4. Product-sustaining activities 5. Batch-level activities 6. Unit-level activities

What is Activity-Based Management (ABM)?

ABM - the process of using ABC information to evaluate the costs and benefits of production and internal support activities and to identify and implement opportunities for improvements in profitability, efficiency, and quality within an organization.

What are Activities, and how are they identified?

Activity - type of task of function performed in an organization. Activity Identification: * Track the use of resources. * Use the cost hierarchy. * Grouping homogeneous costs.

What are the Fixed & Proportional Cost Rates?

Attributable fixed resource costs / theoretical capacity Attributable proportional resource costs / budgeted capacity

What is the Cost Pool Cost Function?

Cost Pool Cost Function * Used for budgeting and planning * Monitor and analyze variances * Update at least annually

What is GPK?

Grenzplankostenrechnung (GPK) * Uses cost centers (smaller than a department, performs single repetitive activity, responsibility of one manager) * Output measure: usually volume of time * Estimated volume: practical or budgeted capacity * Focus on marginal costs for short-term decisions

How does information from ABC, GPK, and RCA affect managers' incentives and decisions?

Key Issues: * Increasing relevance of cost information for short-, mid-, and long-term decisions. * Reducing arbitrariness in cost measurement. * Optimizing use of constrained resources. * Increasing manager awareness of cause and effect relationships. * Identifying non-value-added activities. * Motivating cost reduction. * Identifying and reducing cost of idle/excess capacity. * Balancing costs and benefits of complex costing systems.

What is RCA?

Resource Consumption Accounting (RCA) * Uses resource cost pools (separate resources in separate pools) * Output measure: usually volume of time * Estimated volume: theoretical capacity * Focus on short-, mid-, and long-term decisions

What is the difference between Traditional Costing Systems & Activity-Based Costing Systems?

Traditional Costing System: few cost pools allocated using traditional allocation bases. Activity-Based Costing System: Multiple cost pools reflecting activities and cost drivers for allocation bases.