ABC and ABM Flashcards

Question

what costs does traditional AC not deal well with?

Answer 1

non-volume related activities, e.g.: materials handling material procurement set ups production scheduling inspection

Answer 2

AC - costs first related to cost centres then to cost objects (products). ABC - overheads are related to activities/grouped into cost pools. Then, related to cost objects, e.g. products, customers very similar, but first stage is different, ABC uses activities instead of functional departments

Answer 3

1. identify different activities within org - try keep larger groups to be acceptable/practical 2. relate overheads to activities - support and primary. creates cost pools 3. spread support activities across primary activities - base is cost driver that is the measure of how support activities used 4. determine activity cost drivers - what causes the activity to incur costs? e.g. in production scheduling, driver = number of batches ordered 5. calculate activity cost driver rates - driver rate = cost pool / level of cost drivers

Answer 4

more accurate costing where non vol related OHs are significant/diverse product line flexible enough to analyse costs by cost objects other than products, e.g. processes/areas of responsibility/customers Provides a reliable indication of long-run variable product cost which is particularly relevant to managerial decision making at a strategic level. Provides meaningful financial (periodic cost driver rates) and non-financial (periodic cost driver volumes) measures which are relevant for cost management and performance assessment at an operational level Aids identification and understanding of cost behaviour and thus has the potential to improve cost estimation. Provides a more logical, acceptable and comprehensible basis for costing work

Answer 5

little evidence to date that it improves corporate profitability ABC info historical and internally orientated, therefore lacks direct relevance for future strategic decisions practical problems like cost driver selection novelty is questionable - is it just a rigorous application of conventional costing procedures? can be costly and time consuming to implement

Answer 6

In general ABC is compared to AC, with one flat rate, which is rarely used in practice. European countries already use more sophisticated costing methods and so ABC is less widely adopted, and all round the impact is lower than compared to clunky AC with a flat rate. initial switch from AC to produce more accurate product cost info. usually led to adjustment of pricing policies and product strategies, because high volume long production run products over costed and low volume short run products under costed AC averages batch costs such as setup over all products rather than relating them to the batch.

Answer 7

overheads are high in relation to direct costs diversity in product range products use very different amounts of overhead resources consumption of overhead resources not linked mainly to volume

Answer 8

ABM - System of management which uses activity-based cost information for a variety of purposes including cost reduction, cost modelling and customer profitability analysis. ABM measures effectiveness of key activities by identifying how activity costs can be reduced and value to customers increased. focuses mgment attention on key value add activities, customers and products to help competitive advantage Managers and staff must cooperate when defining cost pools, drivers and KPIs

Answer 9

1. costs of activities and business processes 2. cost of NVA activities 3. activity based performance measures quality, cycle time, productivity and customers examples. provides scorecard of how well improvement efforts are working and is integral part of continuous improvement 4. accurate product/service cost - considers channels and contracting costs 5. cost drivers

Answer 10

unit level - performed every time unit produced. direct labour/materials/energy costs/machine maintenance batch related - set up costs, purchasing resources product sustaining - enables production and sales, e.g. engineering resources, design and advertising costs. tend to increase as number of products increases facility sustaining - maintenance of building, plant security, business rates

Answer 11

empirical studies of ABC implementation show greatest benefit is cost reduction, rather than provision of more accurate product costs. in carrying out analysis to establish product cost, may become clear organisation of activities leads to duplication/waste. ABC also provides info that can be used to regularly monitor activities so aids continuous cost mgment or control. activity or resource consumption - an activity may be viewed as being a collection of resources, which provide an org with service potential. when potential is used, resource consumption takes place. e.g., raw material can be consumed into products.

Answer 12

amount of resource consumed (or activity demanded) in a period by cost objects need not equal the resource available. concept of inventory can be applied to overheads. provision of indirect/support activities provides service potential. ABC assigns these costs to cost object like products on basis of demand for activity or consumption of that resource. change in demand level doesn’t lead to immediate change in level of provision of activity. can meet short term demand increase without increasing provision and hence no additional expense. if demand for quality inspections increases, staff may work a few extra hours. if continues, additional people are needed. usually a delay, unusually immediate. if the demand decreases, unlikely employees will say they have slack. traditional AC won’t highlight this, but ABC will draw it out.

Answer 13

cost drivers must be based on possible activity measures. standard activity cost driver that system uses must reflect underlying efficiency of activities, as measured by cost and quantity of resources supplied per activity. must be how much work CAN be done. The cost drivers can be used to provide a number of different sets of information. The most important set of information provided by cost drivers may be information on customers or groups of customers ABC considers the amount of resource used, rather than how much has been spent. So although, in the short run changes in consumption do not lead to changes in spending (and it has limited use as a short-run tool), in the long run, ABC can lead to real cost savings.

Answer 14

ABM and employee empowerment takes critical step forward beyond ABC by recognising contribution people make as the key resource in any org’s success nurtures good comms/teamwork develops quality decision making leads to quality control and continuous improvement ABM will not by itself reduce costs, only help understanding.

Answer 15

long term, can be used for decisions on pricing, changes to product mix and new product development. When used this way it will help senior mgment and have impact on longer term prosperity of org advocates for ABC for strategic decision making maintain its value lies in greater accuracy, increasing reliability of cost info. End product of an ABC system is an estimate of historical cost of each of an org’s products. however, strategic decision making involves future time periods and thus it is future outlay costs that are needed :( Arguable then whether to use ABC for strategic long term decisions. especially if ABC costing viewed as estimates of longer term costs as nothing is forever and historical costs susceptible to substantial changes. Any historical info must be used with caution when making longer term decisions. but ABC can be a good starting point.

Answer 16

Get the support of senior management, Recognise that ABM requires a major investment in time and resources, Know what ABM can achieve and what information you want from the system Decide which model to use, Choose the model approach that emphasises the operational understanding of all activities in the business Involve people in the field, Transfer ownership of cost management from the accounts department to the departments and processes where costs are incurred, Don't underestimate the need to manage the change process Link ABM to corporate objectives in the form of increased product profitability and added value for customers.

Answer 17

get caught up in too must attention to detail and control. can obscure the bigger picture of make the firm lose sight of strategic objectives in a quest for small savings. important not to fall into trap of thinking ABC is relevant for all decisions. not all costs disappear if a product is discontinued, e.g. rent.

Answer 18

where devised for single project that was not taken up the system got dropped as well. as comms between business units in a large org is often not very good the work was not developed further by other units. finance dept opposed its implementation. often finance staff appear less than dynamic and unable to perceive the needs of the production staff general ledger info isn’t reliable enough to provide reliable ABC info. resulting figures would have been no better than traditional absorption methods.

Answer 19

if organisations do not have reliable ABC information then they also forgo the cost management advantages of an ABM system. Since ABC provides the basic building blocks of activities, without ABC there can be no ABM cost drivers should be based on: measuring the resources a product uses for a particular set of activities, and it has to be linked to the changes of costs in the activity centre (cause-effect relationship). The idea is to analyse the activities that make up a company's processes and the cost drivers of those activities, then question why the activities are being carried out and how well they are being performed. Companies can then improve operations by reengineering, redesigning plant layouts, using common parts, outsourcing or strengthening supplier and customer relationships. Continuous mass production of simple homogenous products is becoming increasingly rare. production now typically takes place in short discontinuous runs a high proportion of costs are decided at design phase. ABB - activity based budget - developed to provide useful financial insights into orgs operations. focuses on activities achieved, output side of things. gives clear impression of what it costs to produce certain outputs. neither ABC or ABB replaces traditional general ledger accounting.

Answer 20

most important set of info provided by cost drivers may be info on customer(s). however, orgs often want more than just info on products and customers, maybe research/market dev/improving learning etc. each one of these makes demands on different activities of business and can be costed by using basic building blocks of activity costs and their drivers. these other cost objects fall into two cateogries generally: business development (new product/market/tech development) org infrastructure (new IT systems and physical or org structures) both areas important to make sure investment being made to secure org’s future and then to control costs. being able to cost both categories therefore useful

Answer 21

recognises individual activities are part of a wider process. activities grouped to form a total process or service, e.g. serving a particular customer involves a number of discrete activities that form the total service. strategic activity management attempts to classify each individual activity within whole as value add or not (NVA), and therefore eliminated.

Answer 22

strategic activity mgment is more than just eliminating NVA activities. by identifying cost and value drivers for each activity, mgment can develop activities and linages between them to differentiate themselves from competitors. in addition, by understanding factors which influence costs of each activity, firm can take action to minimise these costs in medium term. ABC info can be used in an ABM system to assist strategic decision, such as whether to continue with a particular activity effect on cost structure of a change in strategy. how changes in activities and components affect the suppliers and value chain. primary activities should add value, secondary are potentially NVA and must be assessed to ensure they assist primaries in adding value.

Answer 23

Bellis-Jones (92) noted typically prior to ABM 35% of staff time spent on NVA activities, after that total staff time declined and % time spent on NVA fell to 20% of reduced figure. NVA activities often caused by inadequate processes and cannot be eliminated unless inadequacy addressed. e.g., customer complaints are NVA but cannot be eliminated unless source of complaints dealt with.

Answer 24

in many orgs, important to cost customers and products. different customers differ in profitability, relatively new ABM technique that ABC info makes possible because it creates cost pools for activities. customers use some activities but not all and different groups of customers have different activity profiles definition: the analysis of revenue streams and service costs associated with specific customers or customer groups

Answer 25

in recent years firms have moved from product-centric to customer centric, as a source of competitive advantage. CPA is intended to provide a guide for actions to be taken through a CRM initiative. service orgs in particular need to cost customers

Answer 26

when an org analyses profitability of customers, not unusual to find a pareto curve. e.g., 20% of customers provide 80% of profit, next 40% smaller and last 40% of customers actually reduce total profit, so no point in serving them as the situation stands but may be foolish to just refuse to service them, so try turning them profitable somehow

Answer 27

a multifunctional team should be set up to find ways of making them profitable, usually small volume customers are unprofitable because of high batch costs and order processing. one org introduced third party wholesaler to supply chain and significantly reduced cost of serving small order customers. at same time the org found that product range and service to small customers improved so company saved cost and customer had better service

Answer 28

distribution channels = the means of transacting with customers. channel is point of purchase which need not be the point of direct channels: sales teams, telephone, shops, internet indirect channels: retailers, wholesalers, resellers, agents

Answer 29

ABC makes this possible because it creates cost pools for activities. channels will use some activities but not all, and different channels will have different activity profiles. This is a typical example of cost transformation: switching channels would result in reduced channel distribution costs, and a better profitability profile for the product or service

ABC and ABM Flashcards

(53 cards)