Lecture 9+10 - Hierarchical + Time-driven ABC Flashcards
(!!) Describe the hierarchy of activities
General:
- Consider variability
- Consider some reversibility
- Reduce lack of controllability
- Control non-value-added activities: Eg. moving things
- Differentiate operating efficiency & capacity management
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Unit-level activities:
General:
- Resources sacrificed per unit
- Costs directly related to output
- Not marginal cost since incl. allocated FC
- Include some sunk costs: Both direct & indirect
- (Manufacturing operating costs)
Expenses:
- Direct labour
- Materials
- Machine costs: Depreciation
- Energy
Costs:
- VC: With respect to output
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Batch-level activities:
General:
- Resource sacrificed pr unit group
Expenses:
- Purchase orders
- Paying suppliers
- Material movements
- Receiving material
- Inspection
- Setup
Costs:
- FC: With respect to output
- VC: With respect to other CD´s
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Product sustaining activities:
General:
- Resources sacrificed to support individual products & diversity
- No cause & effect relationship
- Also services
Expenses:
- Process engineering: Design cost
- Product specifications
- Engineering change notices
- Product improvement
Costs:
- FC: With respect to output
- VC: With respect to other CD´s
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Facility sustaining activities:
General:
- Res. sacrificed to support firm
- Non-traceable to individual prod.
- Administration costs
- Hard cause-&-effect
- Often long commitment
- Not related to operational or manageable cost driver
- Change require change in long term strategy
- (Can be allocated by for an example direct manufacturing labour if need of including all costs at set selling price)
Expenses:
- Plant management
- Building & grounds
- Heating & lighting
- Rent & building security
- Cost of being in business
- Executive manager salary
Costs:
- Strategic cost: Fixed with respect to any controllable cost driver
Describe the difference between unit- & higher-level resources
Unit level resources:
- Can be acquired as needed
- Flexible: Adjust to volume
- Variable with output
Higher-level resources:
- Must be acquired in advance
- Fixed with output
- Often committed resources: Cannot adjust to volume
(?) Describe the five steps from the Plastim case
- Activity
- Step 1 - Cost hierarchy category
- Step 2 - Total costs:
- Step 4 - Quantity of cost allocation base
- Step 3 - OH allocation rate
- Step 5
- Calculation: 3 / 4 - Explained cause & effect relationship motivating choice of allocation base
- Not a step
(!!) Describe time-driven ABC in general
- Track processes instead of activities: Fewer
- Focus on time: Sec, min, hours
- Use time equations: ERP assisted
- Accuracy depend on estimates
- Estimates systematic or by allowing X% to breaks/downtime
- Introduce standard time
- Mainly for service firms: Eg. Bank & hospital
- On-going cost reports
- Require effective ERP-system
- Add cycle time for activities: Calculated or estimated
- Surveys required if more than one activity to know proportions
- Same data-requirement as traditional ABC: Reliability
- Duration drivers should not be hard coded, just easy applications
- Starting point: Cost centre & related OH cost
- Estimate resource demand for transactions instead of assigning resource cost to activities
(!!!) Describe the benefits & critiques of TDABC
Benefits:
- Easy to update cost driver
- More accurate: Unused capacity. Over/under.
- Cost estimates not subjective
- Model easier to validate
- Eliminate survey to define cost pools: Time consuming
Critique:
- Rely on employee surveys
- Accuracy of assumptions on practical full capacity questionable
- Require homogene, repetitive task
- Not objective truth: Estimation
- Ethical problem of controlling efficiency: Unused capacity
- Assume similar transactions require same process time
- Rely on simple time estimates
(?) Describe the elements in Time-driven Activity Based Costing / TDABC
Estimate cost pr. time unit of cap.:
- Practical capacity as % of theoretical capacity: By manager
- Done systematically or by allowing X% to breaks/downtime
- Many different capacity measures: Eg. Space or time available
Estimate unit times of activities:
- Time carrying out each unit of each kind of activity
- Observe or interview employee
- Give standard rate to assign costs: Lower than traditional ABC due to no full utilization
Describe standard time
- Agreed time for certain activity
- Observed or ask employees
(?) Describe the evolvement of ABC
- Got more pragmatic
- New focus on less activities
- New focus on getting right info
- No more mindless textbook methods
- Renewed interest when web based application
- Evolved to time-driven ABC
(!!!!) Relate traditional to time-driven ABC
General:
- Not mutually exclusive
- Often using both as hybrid
- Pilot implementation: Only some departments with TDABC
ABC:
- More time-consuming & costly
- Hard to implement & update
- Most used in production
- Not aware of excess capacity: Just divide sum out
- Less accurate: Rarely updates
- Difficult large scale
- Require stable processes
- Higher standard cost
TDABC:
- Less time-consuming & costly
- Easier to implement & update
- Most used in service organizations: Many man-hours
- Highlight excess capacity
- More accurate: Current condition
- Benefit both small & large firms
- More flexible cost model: Capture complexity of operations
- Lower standard cost: No full utilization
- Poss. to evaluate each element in time equation is relevant & add value to cost object
Calculate the capacity cost rate
Cost of capacity supplied / practical capacity of resources supplied
Describe the procedures of hierarchical ABC & TDABC
Hierarchical ABC:
1. Identify cost object
2. Identify products direct costs
3. Select cost allocation base for indirect costs
4. Identify indirect costs associated with each cost allocation base
5. Compute rate per unit of each cost-allocation base used to allocate indirect costs to product
6. Compute indirect costs allocated to products
7. Compute total costs of product by adding all direct & indirect costs assigned to them
TDABC:
- Identify key activities
- Decide activities standard time
- Calculate standard cost pr activity
- Count number of activities
- Allocate cost according to # actual activities multiplied by standard cost per activity
- Refined if creating sub-activities into a time-equation
(!) Describe time-equations
- Allocate cost to cost objects by multiplying total time w. CDR per time unit
- List of potential activities adding up to time spent on cost object
- Variable set to 0 as certain activity in cost object not used
- Allocate costs to specific cost objects using specific time consuming activities
- Enable cost management of customer specified products
- Contain sub-activities
(!) Show some calculations on levels
