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Flashcards in Costing - ABC and Process Management Deck (9):

Activity Based Costing (ABC) is a method for assigning overhead (indirect costs) to products.

Alternative to traditional volume-based approach of accumulating large amounts of overhead in single pool and assigning costs across all products based on labor dollars, hours, or some other generic allocation based. Volume approach does not accurately reflect true relationship between products produced and costs incurred


Activity Based Costing Terminology

Activities - Procedures that comprise work

Cost drivers - Measures that are closely correlated with the way an activity accumulates cost; for example, cost drivers are the basis by which costs are assigned to products

Cost pools - A group of costs that are associated with a specific cost center

Cost center - An area where costs are accumulated and then distributed to products, for example A/P

Value-added activities - Processes that contribute to product's ultimate value; design and packaging in addition to direct conversion of direct materials into finished goods

Nonvalue-added activities - Processes that do not contribute to product's value; includes items such as moving materials and more obvious activities such as rework


Activity-Based Costing Characteristics

A) Activity-based costing begins by identifying activities. Activities form the building blocks of an ABC system because activities consume resources; 4 categories

1) Unit level activities - Activities that must be performed for every product unit

2) Batch level activities - Activities that must be performed for each batch of products produced

3) Product sustaining level activities - Activities that are necessary to support the product line as a whole such as advertising and engineering activities

4) Facility (general operations) level activities - Activities that are necessary to support the plant that produces the products; plant manager salaries, insurance


Activity-Based Costing Characteristics CONT

Once activities identified, overhead costs assigned to them. Costs assigned to particular activity comprise an activity cost pool. Next, cost drivers are identified so they can be used to allocate costs to products. ABC cost pools are a larger number of smaller pools so they can be more aligned to products


Effects of Adopting ABC

******A. Because of the way activity-based costing identifies and allocates costs, organizations that adopt activity-based costing tend to have:
1. More precise measures of cost
2. More cost pools
3. More allocation bases (e.g., multiple causes for costs to occur)
B. Activity-based costing can be used:
1. With job order and process costing systems
2. With standard costing and variance analysis
3. For service businesses as well as manufacturers
C. In general, compared to traditional, volume-based costing, activity-based costing tends to shift costs away from high volume, simple products to lower volume, complex products.


Process Management


Processes can be defined as a SERIES OF ACTIVITIES CONDUCTED TO ACCOMPLISH A DEFINED OBJECTIVE. Implies that a process uses resource inputs to achieve an organization's outputs. - ACTIVITY BASED MANAGEMENT (ABM)

2 key objectives

1) Increase manger understanding - cause-effect relationships between processes and resources consumed

2) Promote elimination of wastes to help achieve managerial objectives

Process management highlights INTERDEPENDENCIES across functional business areas - supports view CONTINOUS IMPROVEMENT of processes are important

BPR BUSINESS PROCESS REENGINEERING - REENGINEERING is a process analysis approach that typically results in a radical change. BPR is an effort to make an EXTREME transformation



Can be defined by contracting business processes to an external provider


Shared Services

One part of an organization provides essential business process that previously had been provided by multiple parts of same organization. Shared-service provider operates as an internal business

1. The main purpose of shared services is to provide a process in a more effective and more efficient manner that lowers cost.
2. Although costs often go down with shared services, the risks to converting a process to a shared service include: the cost of moving or restructuring operations; the reduction of service specificity to the needs of specialized processes; and the possibility of less-timely delivery.


Offshore operations

Offshore operations -- A process is moved to a different country. The movement can be to either an internal or external provider. The distinction between outsourcing and offshoring is that outsourcing is always outside of the company (but may or may not be outside the country), while offshoring is always outside of the country (but may or may not be outside the company).
1. Offshoring is almost always due to cost savings by gaining access to lower cost economies. Upstream phases of the value chain (e.g., R&D) are processes that are not often offshored due to the lack of access to high skills in areas that have cheap labor. Production and service processes are those most often offshored.
2. Risks typically involve language or cultural issues and difficulty protecting intellectual property rights in some foreign countries.

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