...Activity-based Cost Management --An Executive’s Guide Gary Cokins John Wiley & Sons, Inc. Introduction The concept of Activity-based cost management was born from the belief that traditional costing systems have inherent limitations that do not accurately assign indirect and overhead costs in all situations. Managers that are familiar with their organization’s operations know that different products and services consume these costs in varying proportion, but traditional costing systems tend to spread these costs evenly over all products and services offered. Assignment of overhead costs based on direct labor hours or square footage occupied by facility do not always serve as accurate means of allocation. Costing accuracy enables decision-making that is less likely to result in poor performance, and provide organizations with competitive advantages. Activity-based cost management is a means to solve this problem. In its early years, Activity-based cost management (ABC/M) gained popularity rapidly in the management consulting community. It was oversold as the “magic pill” to solve almost every problem within an organization, and the expectations of management were raised too high. As a result, many early implementations of ABC/M were viewed as failures. Some of these perceived failures were resultant from design misunderstandings and others from an inability to interpret the data produced. Management didn’t understand that ABC/M is meant to act as an enabler...
Words: 2428 - Pages: 10
...A P T E R F I V E INTRODUCTION TO COST MANAGEMENT Activity-Based Costing and Management After studying this chapter, you should be able to . . . 1. Explain the strategic role of activity-based costing 2. Describe activity-based costing (ABC), the steps in developing an ABC system, and the benefits and limitations of an ABC system 3. Determine product costs under both the volume-based method and the activity-based method and contrast the two 4. Explain activity-based management (ABM) 5. Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations 6. Use an activity-based approach to analyze customer profitability 7. Identify key factors for successful ABC/M implementation PART I Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin This chapter has a lot to do with implementing the spirit of Benjamin Franklin’s observation—in cost management terms—that it really does matter how accurately you calculate a cost. Why? Having accurate costs is important for a variety of reasons: a company might find that it has a difficult time determining which of its products is most profitable. Alternatively, it finds its sales increasing but profits declining and cannot understand why. Perhaps the company keeps losing competitive bids for products and services and does not understand why. In many cases, accurate cost information is the answer to these questions. Accurate cost information provides a competitive advantage...
Words: 26371 - Pages: 106
...Recently, Activity-based costing (ABC) is defined as a methodology that measures the cost and performance of activities, resources, and cost objects. Specifically, resources are assigned to activities, then activities are assigned to cost objects based on their use. ABC recognizes the causal relationships of cost drivers to activities (Institute of Management Accountants, 1998). In other words, the objective of activity-based costing is to understand the causes of overhead costs and to identify the real probability of products and customers. Moreover activity-based costing purpose is allocation of indirect costs based on causal activities. Meanwhile, there are three important characteristics of ABC: 1) Simple traditional distinction made between fixed cost and variable cost is not enough guide to provide quality information to design a cost system. 2) The more appropriate distinction between cost behavior patterns are volume related, diversity related, events (decisions) related and time related. 3) Cost drivers need to be identified. A cost driver is a structural determinant of cost related activity. The logic behind is that cost drivers dictate the cost behavior pattern. In tracing overhead cost to product, a cost behavior pattern must be understood so that appropriate cost driver could be identified. In addition, ABC have different structure ranges, such as multiple product, complex product, complex production system and significant variation in volume between high...
Words: 1064 - Pages: 5
...choice- either adapt with the times while reducing costs or reduce production and lay off employees. An industry in a similar fate today is the brick and mortar consumer electronics retail stores, such as RadioShack and Best Buy. Over the past few years the an increasing number of consumers are purchasing electronics online from online retailers. Many times, the prices at these retailers are cheaper than their brick and mortar competitors because they don’t have the same fixed cost structure as them. To help draw consumers back into stores, traditional electronic retailers must adapt with the times, by updating their websites to make them on par with the online competitors, while reducing fixed costs1. 5. Prior to 1994, performance at MiCRUS was measured by comparing total costs per wafer at the MiCRUS plant to the industry benchmark. Although this method is certainly a viable option, it did not allow managers to focus on specific costs, which might be considered unnecessary. For example, the article states that in order to succeed, MiCRUS “had to be as efficient as possible, concentrating everyone’s efforts and talents on keeping costs low while maintaining rigorous technical requirements for quality”. Under the costing system at the time, this concentration on keeping costs low must have been a difficult task, as all costs were pooled together. Although the managers at MiCRUS used all available information to help them reduce costs, this information was quite vague and limited...
Words: 1018 - Pages: 5
...Medicine & Public Health Specifics of the Activity-Based Applications in Hospital Management Boris Popesko * Tomas Bata University in Zlin, Czech Republic * Corresponding Author; Email: popesko@fame.utb.cz Abstract Paper analyses the specifics of the application of Activity-Based Costing method in hospital management. Primary objective of the paper is to outline the methodology of the ABC application in hospitals. First part of the paper analyzes the ways of ABC implementation in published foreign studies. Second part describes the individual steps in ABC application and discusses the differences in the application procedures between the manufacturing and hospital organization. Key words: Healthcare Management, Cost Management, Activity-based costing, Introduction In the last decade, many non-profit and hospital organizations started to face difficulties and challenges in balancing limited resources and costs to provide their demand for services. Due to the introduction of modern medical techniques and medicines and consequent increase of consumed costs, many hospitals are under pressure to adopt more advanced cost management techniques usually utilized only in profit organization sector. Hospital managers frequently seek the advanced techniques, for better understanding of relations between the cost and provided services. One of the key factors of effective company management is ability of accurate estimation of the cost of products. Product costing is an essential...
Words: 3077 - Pages: 13
...frequently more relevant than direct labor hours. 4. Overhead allocation to high volume products is responsible for less overhead cost per period, where overhead allocation to low volume products under a traditional costing system is responsible for more overhead cost per unit than the high-volume. 5. Activity based costing (ABC) is an overhead cost allocation system that allocates overhead to multiple activity pools and assigns the activity cost pool to products or services. Traditional product costing is determined through overhead cost. 6. Activity-Based Overhead Rates = Overhead/ Direct Labor Hours 7. The steps involved in developing an activity based costing system are identify and classify the activities, identify the cost driver, compute the activity based overhead rate, and assign overhead costs to production. 8. A value-added/non-value added flowchart is based on an analysis of all the activities preformed to manufacture a product. The flow chart will record each activity done and the time correlating to the activity. 9. Activity cost pool is the overhead cost attributed to a distinct type of activity like ordering materials. Gathering/pooling of all the cost in one activity. 10. A cost driver is any factor or activity that has a direct cause and effect relationship with the resource consumer. 11. A cost driver is accurate and appropriate when you have a high degree of correlations that must exist between the...
Words: 557 - Pages: 3
...CHAPTER 5: ACTIVITY-BASED COSTING AND MANAGEMENT QUESTIONS 5-1 Product costs are likely distorted when a firm uses a volume-based rate if the plant has more than one activity in its operations and not all activities consume overhead in the same proportion. The more diverse the product mixes of the plant are in volume, sizes, manufacturing processes, or product complexities, the greater the cost distortions are likely to be in using a volume-based rate. Undercosting a product may appear to have increased the reported profit the product earned (assuming the firm did not lower its selling price because of the reported lower product cost). However, the increased profit is, at best, a twist in truth. Costs of the product not charged to the product itself are borne by other products of the firm. Worse, undercosting a product may result in managers erroneously believing the product to be more profitable than other products and shifting the limited resource the firm has into manufacturing, promotion, and sales of the product when, in fact, other products are more profitable to the firm. Severe cost distortions may lead firms not to drop unprofitable products because the cost data show these products are profitable. 5-3 Overcosting does not increase revenues. A firm can increase the selling price of a product, thereby increasing the total revenue from the product only if the market allows. Increases in the selling price of a product without experiencing noticeable decrease in the sales...
Words: 15942 - Pages: 64
... | |Activity-Based Costing | |Product/Cost Relationships | | | | | | | | | 11/5/2007 Origin Activity Based Costing, or ABC for short, has been in use since the early 20th century. As the manufacturing industry became more complex, managers needed a way to keep a closer watch on manufacturing costs within the company. This in turn allowed them to more appropriately price their products, making them more competitive. (DirectoryM) ...
Words: 1200 - Pages: 5
...Tutorial 5 Q1 Describe the shortcomings of traditional approaches to overhead cost analysis. A traditional approach is a costing method that is used to allocate manufacturing costs to specific products. It uses single cost driver such as machine hours, direct labour hours to allocate indirect manufacturing costs. Traditional costing approaches can referred as the conventional method. However, there are many cost drivers in reality when factory overhead occurred, such as machines setups, or inspections. Since it missed out the others cost driver, it may fail to identify opportunities for cost efficiency, or allocate inaccurate per-unit cost, subsequently will results the managers unable to make a clear and strategic decision during costing. Nevertheless, traditional costing approaches also may not take into account consumer demand or unique features of product; it might reduce the improvements of the organization. Even though traditional approaches may easy to apply in each size of manufacturing business, yet it will become less reliable due to increased in the level of diversity of output rises and the level of complicated of manufacturing project. For example, if a business that has a lot of overhead expenses, it needs a more reliable and accurate costing approaches to identify or allocate the overhead costs to different products. If the costs and prices allocated incorrectly will causes the competitive position affected. Manufacturing environment has tried hard to find...
Words: 1393 - Pages: 6
...M2 discussion managerial accounting Unit 2: Module 2 - M2 Assignment 1 Discussion Discussion Assignment Assignment 1: Discussion—Activity-Based Costing System Activity-based costing is one of the most accurate methods that can be used to allocate overhead. However, it is not often used in many smaller organizations due to the substantial cost involved with its implementation. Using the module readings and the Argosy University online library resources, research the activity-based costing method. Use your research and/or your experiences as a working professional to complete this assignment. Respond to the following: If you have utilized an activity-based costing system in your former or current employment, describe how this system had been used. In your response, be sure to include your experience and position on the effectiveness of the activity-based costing system. Support your ideas by drawing on your readings and scholarly articles. If you have not encountered this type of system in your work experience, assume a company needs to switch to an ABC system. Describe the common cost drivers that could be used. How would the organization identify the cost drivers? How would the organization use them in the implementation of this system? You may use your former or current company for the analysis. Write your initial response in 3–4 paragraphs. Apply APA standards to citation of sources. By Saturday, June 21, 2014, post your response...
Words: 5923 - Pages: 24
...[pic] Managerial Accounting BA3201 |Puganeswary Thirumalai Naidu |307254805 |BABHM | |Tan Lian Ping |11001200428010 |BABHM | |Yasmin Lim Binti Mohd.Arifin |307147803 |BBA MKT | |Herry Abubakar Mshihiri |609687502 |BBA IB | Question1 | |Task 1 : Sales and Labour Budgets : University | | | | | | | | | |1 (a) | | | | | ...
Words: 1871 - Pages: 8
...Managerial & Cost Accounting ACCT610 Activity-Based Management Made Possible By Activity-Based Costing Supervised by Professor Majboor Alnamri Prepared by: EMBA Student 1 KAAU - EMBA Overview • • • • • • Over/Under Costing Methods of Allocating Indirect Cost Refining a cost system Costs/Benefits of ABC ABC in service & retail Example from an Organization 2 KAAU - EMBA Over Costing & Under Costing Over Costing—a product consumes a low level of resources but is allocated high costs per unit. Under Costing—a product consumes a high level of resources but is allocated low costs per unit. KAAU - EMBA 3 KAAU - EMBA Activity-Based Costing Identifies activities required to produce the product or service Determines the cost of the activities Allocates costs to the cost object based on the object’s consumption of activities 4 KAAU - EMBA Methods of Allocating Indirect Cost Cause-and-effect Using this criterion, managers identify the variable or variables that cause resources to be consumed Benefits-received Using this criterion, managers identify the beneficiaries of the outputs of the cost object 5 KAAU - EMBA Methods of Allocating Indirect Cost Fairness or equity This criterion is often cited on government contracts when cost allocations are the basis for establishing a price satisfactory to the government and its suppliers. Ability to bear This criterion advocates allocating costs in proportion...
Words: 1207 - Pages: 5
...Activity-based Costing Activity-based costing, is a system that follows a two-stage procedure to assign overhead costs to products. It identifies activities in a company and assigns the cost of each activity resource to all products and services according to the actual consumption by each. As revealed in the article, this costing method had both pros and cons. The article favored the advantages of the ABC method although the satisfaction scores were below the average for all tools used. For those companies that disfavored ABC method, the most common complain was that it took too much money and time using this method, and the method might not capture the complexity of their operations. In fact, ABC method is not production-specified. For production costs, standard costing was still “kill of the hill” with a usage rate of 42% according to the article. However, it is inaccurate to say that ABC method is increasingly being abandoned, only four out of 141 organizations previously used ABC but no longer use it according to the survey. In addition, the survey revealed that around sixteen percent companies considered ABC but chose not to implement it. The main concerns of managers of those companies regarding which cost-measurement system to choose were that they were not sure if it was a better way to allocate cost, if it accurately reflected how resources were used, if the information was timely, and if updating the system was difficult. Having said about the disadvantages and...
Words: 596 - Pages: 3
...Accounting Information for Managers To Make Better Decisions 1 Abstract This paper analysis how the accounting information would support the decision making process. The main goal of an accounting system is to provide financial information about the organization including financial situation and the performance of the organization. The decision makers should know the situation of the organization either by comparing competitors or previous periods’ performance in order to achieve the objectives of the company and this being possible by using accounting information. In addition, this thesis studies the importance of having effective and efficient accounting system to make better decision as it relates to increase the profitability target of an organization. Organizations should replace their weak accounting system in order to ensure that each team member in the Accounts Department is conscious of their role to produce good accounting information (1, Okoli Margaret). The result of this paper describes that providing right information to the right people in time via management reporting to maximize the use of reports in decision-making. 2 Introduction Any organization should survive and excel in the fast paced and ever changing market. We are living in the digital era so information can be found everywhere via websites, databases documents, reports, and emails. However, it’s important to read the historical data-set during decision making process but providing report in quick...
Words: 2005 - Pages: 9
...2010-023X Factors Influencing Activity-Based Costing Success: A Research Framework Zhang Yi Fei and Che Ruhana Isa becoming more and more popular [3-7] ABC aims to provide accurate costing information to managers to allocate activity costs to products and services by applying cost drivers [8]. Academics who advocate ABC, such as, Cooper and Kaplan [9], and Swenson [10] argue that it provides more accurate cost data needed to make appropriate strategic decisions about product mix, sourcing, pricing, process improvement, and evaluation of business process performance. These claims have led many firms to adopt ABC systems [8]. The benefits of ABC and its positive impact on firm’s performance motivated a numerous studies which examined various aspects of ABC. Among such studies are McGowan [11] who assessed the integrity of ABC success, Innes and Mitchell [4, 12] and Yanren [13] who conducted research on factors affecting ABC adoption, and Shield [3], Shields and McEwen [14], Gosselin [15] and Baired et al.[16, 17]who concentrated on factors influencing ABC success especially at the implementation stage. However, there is mounting evidence that suggests most of firms are experiencing problems in implementing ABC and, in some extreme cases, ABC implementation is not successful [3], which later resulted in abandoning the ABC systems altogether [15]. Questions arise as to why ABC implementation is successful in certain companies and fails in others. Based on the contingency theory, researchers...
Words: 6138 - Pages: 25
