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Using Activity-Based Cost

Management to Add Value

Activity-based cost management usesactivity analysis in decision making.

Activity-based costing focuses on activitiesin allocating overhead costs to products.

Activity-based management focuses on

managingactivities to reduce costs.

L.O. 1 Explain the concept of activity-based cost management.

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Using Cost Hierarchies

L.O. 2 Use the hierarchy of costs to manage costs.

Cost Example

Supplies

ubricating oil!achine repair

"ierarchy evel

#olume related

Cost $river Example

$irect labor cost

!achine-hours%umber of units

Setup costs!aterial handlingShipping costs

&atch related Setup hours'roduction runs%umber of shipments

Compliance costs$esign and specification costs

'roduct related %umber of products

(eneral plant costs'lant admin. costs

)acility related $irect costs#alue added

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Using ABC Costing!

Customers and uppliers

L.O. 4 Use activity-based costing methodsto assess customer and supplier costs.

Step / ,dentify the activities that consume resources.

Step 0/ ,dentify the cost driver associated *ith each activity.

Step 1/ Compute a cost rate per cost driver for each unit

or transaction.Step 2/ Assign costs to customers by multiplying the cost driver

rate by the volume of cost driver units consumed by theactivity or transaction that occurred.

Use the same four-step A&C product costingprocess to assess customers and suppliers.

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Cost of Customers

tep 1! "dentify the Activities

LO

4

3hat activities consume resourcesfor 4ed+s delivering service5

'rocess )lo* of the $elivery Service 6 4ed7s umber

Enterorder

'ickorder

$eliverorder

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Cost of Customers

tep #! "dentify the Cost $rivers

LO

4

Cost $river

%umber of orders entered%umber of items picked%umber of deliveries made8rder value

Activity

Entering order'icking order$elivering order$elivery administration

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Cost of Customers

tep %! Compute the Cost $river &ates

LO

4

Computation of Cost $river 4ates 6 4ed7s umber

Entering orderPicking orderDelivering orderDelivery adminitration

!ctivity

"100#000"150#000"300#000"250#000

10#000 order75#000 item12#500 deliverie"5#000#000 order val$e

"10 %er order" 2 %er item"24 %er delivery5& o' val$e

!ctivity(ot

(ot Driver)ol$me

(ot Driver*ate

++++

,,,,

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Cost of Customers

tep '! Assign Costs Using ABC

LO

4

Cost $river ,nformation by Customer 6 4ed7s umber

%umber of orders%umber of items%umber of deliveries8rder value 9total sales:

;< =;< 0;

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Cost of Customers

tep '! Assign Costs Using ABC

LO

4

Entering order 9? >< per order'icking order 9? >0 per item:$elivering order 9? >02 per delivery$elivery administration@otal delivery costs

> ;

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Using and upplying &esources

L.O. 5 $istinguish bet*een resources usedand resources supplied.

4esources used/Cost driver rate multiplied bythe cost driver volume

4esources supplies/Expenditures or the amountsspent on a specific activity

Unused capacity/$ifference bet*een resourcesused and resources supplied

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Computing the Cost of Unused Capacity

L.O. 6 $esign cost management systems to assign capacity costs.

Actual activity/Actual volume for the period

@heoretical capacity/Amount of production possible under idealconditions *ith no time for maintenancebreakdo*ns or absenteeism.

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Computing the Cost of Unused Capacity

LO

6

'ractical capacity/Amount of production possible assuming only theexpected do*ntime for scheduled maintenance

and normal breaks and vacations.

%ormal activity/ong-run expected volume

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Managing the Cost of (uality

L.O. 7 $escribe ho* activities that influenceBuality affect costs and profitability.

uality as defined by the customer

8rganiDation is managed to excel on all dimensions

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Cost of (uality

L.O. Compare the costs of Buality controlto the costs of failing to control Buality.

'revention/ Costs incurred to prevent defects in the

products or services being produced6 !aterials inspection6 'rocess control6 uality training6 !achine inspection6 'roduct design

Appraisal/ Costs incurred to detect individual units ofproducts that do not conform to specifications6 End-of-process sampling6 )ield testing

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Cost of (uality

LO

8

,nternal failure/ Costs incurred *hen nonconforming productsand services are detected before beingdelivered to customers.

6 Scrap6 4e*ork6 4einspection4etesting

External failure/ Costs incurred *hen nonconforming productsand services are detected after being delivered

to customers.6 3arranty repairs6 'roduct liability6 !arketing costs6 ost sales

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)nd of Chapter 10

Copyright 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e".McGraw-Hill#Irwin