CHAPTER 5 Activity-Based Management Chapter Outline A. Cost Management Challenges — Chapter 5 presents three questions to be answered in this chapter. 1. Is activity-based costing (ABC) enough by itself to improve efficiency? Can cost managers ensure that an organization will meet its efficiency goals merely by measuring costs more accurately by using ABC? 2. Does the cost manager’s responsibility end with making recommendations for improvements? Are the
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customer's order is assumed to cost the same average amount to process. This is a problem for Super Bakery because customer’s orders do not consume the same amount of resources and has difference profitability. Super Bakery adopted an ABC system that’s main focus is placed on capturing actual costs directly by a customer order rather than by product. Overhead service expenses are high and variable, while contracted manufacturing costs are fixed. To get a more accurate cost of order processing for each
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products. The R&D activity is an overhead cost center that provides services only to in-house manufacturing departments (four different product lines), all of which produce agricultural/farm/ranch related machinery products. The department has never sold its services outside, but because of its long history of success, larger manufacturers of agricultural products have approached Ideal to hire its R&D department for special projects. Because the costs of operating the R&D department have been
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4.1 (a) What is the group’s underlying cost structure? $500,000 + ($25 x Procedures) (b) What are the group’s expected total costs? $500,000 + ($25 x $7,500) $500,000 + $187,500 = $687,500 (c) What are the group’s estimated total costs at 5,000 procedures? At 10,000 procedures? $500,000 + ($25 x $5,000) $500,000 + ($25 x $10,000) $500,000 + $125,000 $500,000 + $250,000 = $625,000 = $750,000 (d) What is the average cost per procedure at 5,000, 7,500, and 10
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000 in 2011 to $ 706,000 in 2012: | 2011 Actual | 2012 Estimated | Beer sales (100,000 cases) | $1,000,000 | $1,000,000 | Less: Cost of goods sold | | | Direct material | 150,000 | 150,000 | Direct labor | 125,000 | 25,000 | Applied overhead* | 95,000 | 19,000 | Gross profit | $630,000 | $806,000 | Less: Selling and administrative costs | 100,000 | 100,000 | Net income | $530,000 | $706,000 | * For 2012, overhead was applied at the 2011 rate of $ 9.50 per direct labor
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is the severe decline in profit. Issues underlying these problems are stated below: (1) In the past, Elkay’s traditional standard costing system simply ignored its products diversity and cost structure; it did not reflect its actual resources consumed by products; gave inaccurate information about product costs and customer profitability by wrongly allocated
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freight and passenger road transport is the operating cost per tonne or tonne-km (or per passenger or passenger-km). Level of service aspects such as travel time, reliability, safety, comfort and security are also important, as well as environmental impacts. Trucks: In countries where large-scale intercity trucking operates efficiently in medium-income countries with predominantly flat terrain, recent experience is that the transport cost per km for a truck-trailer is between US$0.75 and US$
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benefit resulting from a small increase in some activity, with the marginal cost, the additional cost resulting from a small increase in some activity. If the marginal benefit is greater than the marginal cost, we want to increase the level of the activity. Doing so will increase our total well-being by the difference between the marginal benefit and the marginal cost. If the marginal benefit is less than the marginal cost, we want to reduce the level of the activity. If they are equal, we are at
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us out with their abilities. 2.0 INTRODUCTION The Chartered Institute of Management Accountants (CIMA) has stated that an activity-based management (ABM) is a process of using information from activity-based costing to analyze activities, cost drivers and performance so that customer value and profitability are improved. ABM also subsequently defined by CAM-I(Consortium for Advanced Manufacturing-International) as a discipline that focuses on the management of activities as the route to improving
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service. b. starts with the selling price of an organization’s end product minus the operating profit to establish the target cost. c. starts with the selling price of an organization’s end product minus actual manufacturing, overhead, and materials costs to determine operating profit. d. starts with the supplier’s price, and works to determine the supplier’s true cost structure. e. starts with the buyer’s lowest reasonable price target, and works to a negotiated price agreed on by the buyer
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