ACTIVITY BASED COSTING AND MANAGEMENT

ACTIVITY BASED COSTING AND MANAGEMENT - Transcript

SESSION VI ACTIVITY BASED COSTING AND ACTIVITY MANAGEMENT MANAGEMENT
Traditional system is adequate for providing costing information Traditional as long as 1 Indirect resources are not a significant cost in 1 Indirect manufacturing products or providing services manufacturing 2 All products or services use more or less equal or All proportional amount of indirect resources proportional 3 When indirect costs are a major operating cost the cost When distortion becomes more serious distortion ABC enables a company to truly understand the cost of manufacturing and selling products pricing product mix design process restructuring and improving customer profitability profitability

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ABC DATA BASED CLAIMS ABC PROCESSING DEPARTMENT
Input claims Verify and analyze claims Determine eligibility Make copies Respond to enquiries Write correspondence Attend training The Rise of Activity Based Costing Part Four What Do Actvity Based Cost System Look Like What Robin Cooper Reading Issue in Cost Robin Management Ed By James M Reeve pp 32 45 Management

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ACTIVITY DICTIONARY CREDIT ACTIVITY CARD DEPARTMENT CARD
Activivity name activity description Cost object Activity driver

Supervising employees scheduling coordinating and evaluating performance

Activities within department Total labour time for

Processing tranactions Sorting keying and verifying Credit cards Preparing statements Reviewing printing mailing Answering questions
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No of transactions No of statements

Credit cards

Answering logging reviewing data bases and calling back Credit cards

No of calls

ACTIVITY BASED COSTING
Resources are spent on activities and Resources

products and services are a result of activities activities A good costing system needs to identify good costs with activities that consume resources and assign resource costs to cost objects such as products and services services
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Activity Resource Cost driver is a factor that causes changes in cost of activity Eg Number of set ups number of engineering hours lot size etc
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WHEN IS ABC SYSTEM NEEDED
Increased lost sale due to erroneous Increased

pricing pricing Kaplan and Cooper ABC has max impact Kaplan on firms with increasing expenses numerous products services customers processes or combinations processes

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STEPS IN DESIGNING ABC STEPS SYSTEM SYSTEM
STEP 1 IDENTIFY RESOURCE COSTS STEP

AND ACTIVITIES AND
What activity work do you do What How much time do you spend on these activities What resources are required to perform these activities What value does the activity have for the product service What customer or organisation customer Then a firm needs to classify all activities according to the Then way in which the activity consume resources way
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Steps continued
STEP 2 ASSIGN RESOURCE COSTS STEP

TO ACTIVITIES TO Either direct tracing or estimate the amount or of time or efforts each employee spend on each identified activity spend STEP 3 Assign activity costs to cost STEP objects objects

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ACTIVITY BASED MANAGEMENT
ABM manages activities to improve the value of ABM products or services to customers and increase the firm s profits firm s High value added activities 1 Critical steps cannot be eliminated from business Critical process process 2 Necessary to meet customer s exp or requirements 3 That if more of them is accomplished customer would That pay more pay 4 That are performed to eliminate quality problem

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Low value added activities TV Low News Broadcasting firm News
Some examples Same news item written by many people The distance between the make up room The

and news room is too long and

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Customer Profitability Analysis




ABM product costing can be extended to ABM customer profitability analysis to identify the best customers customers Providing better services to highly profitable Providing customers customers Securing highly profitable customers from Securing competitors competitors Setting prices based on cost to serve Transforming unprofitable customers through Transforming target negotiations on price quantity deliver terms

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CUSTOMER COST ANALYSIS
All customers do not require the same All

amount of service and attention amount Do you have a nagging customer Do

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