Chapter 1 - ABC and ABM Flashcards
Traditional absorption costing
Overhead absorption rate (OAR)
not suited for decision making - only relevant future cash flows to be considered
Activity Based Costing (ABC)
Resources are assigned to activities, and activities to cost object based on consumption.
ABC Hierarchy
Unit level: materials, direct labour
Batch level: set-up
Product level: resources needed independent of usage (engineering or production design and planning)
Facility sustaining activities: maintenance, security
ABC benefits and limitations
- provides more accurate product-line costing
- flexible to analyse costs by objects (ie processes, mgmt responsibilities, customers)
- provides reliable long running variable costs
- provides periodic financial and non-financial info (volumes vs costs)
- for identification and understanding of cost behaviour
- more logical, comprehensive and acceptable cost basis
- little evidence that ABC improves profitability
- ABC is internal and historical - not suited for future strategic outlooks
- Problem of cost driver selection
- Rigorous application of conventional costing methods
ABC in long term decision making
greater accuracy of product costs
increased cost reliability
long-term variable cost of products
Activity Based Management
ABM: system of mgmt which uses ABC for various purposes
5 basic info outputs of ABM
cost of activities cost of non-value add activity based performance measure accurate product or service costs cost drivers
Problems implementing ABM
if it did not work for one project, the entire system was dropped
finance is not dynamic and not able to perceive needs of stakeholders
GL data is poor and not usable for purpose
Direct Product Profitability (DPP)
Retail sector - attributes purchase price and other indirect costs to each product line. Net profit for each product is available.
ASP -Raw Mat =GP -direct production costs -warehouse costs -transport costs -store costs DIRECT PRODUCT PROFIT
Means Better cost analysis Better pricing decisions Better store or w'house mgmt Rationalization of product range Better merchandising decisions
Customer Profitability Analysis
Analysis of revenue streams and service costs associated with specific customers or customer groups.
Customer profitability curve
20% of customers might generate 80% of the profit
80% of customers might not be profitable to serve
small volume customers might be unprofitable
might warrant usage of 3PL’s
Pareto Analysis
based on 80:20 rule (wealth distribution in Milan)
try to shift to sell more to fewer customers
or
rank products by their contribution
Distribution channel profitability
Asses the profitability based on the different distribution channels chosen (phone, shops, internet, etc).
Activity based budgeting
cost per unit of activity
useful for TQM
(instead ZBB is based on the mgmt structure)
