activities - Cengage Learning

Cost Accounting
Foundations and Evolutions
Kinney and Raiborn
Seventh Edition
Chapter 4
Activity-Based Management and
Activity-Based Costing
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Learning Objectives (1 of 2)
• Identify value-added versus non-valueadded activities
• Explain how value-added and non-valueadded activities effect manufacturing cycle
• Explain why cost drivers are designated in
activity-based costing
Learning Objectives (2 of 2)
• Explain how costs are computed using
activity-based costing
• Describe the types of management
information provided by an activity-based
costing/management system
• Explain when it is appropriate to use
activity-based costing
Activity-Based Management
• Focuses on activities during production
and performance process
• Improves the value received by
• Enhances profitability
An activity is a repetitive action
performed in fulfillment of a business
Activity-Based Management
Activity analysis
Cost driver analysis
Activity-based costing
Operational control
Quality management
Business process
Activity Based Management
• External Benefits
– Increased customer value
– Enhanced profitability
• Internal Benefits
– More efficient production
– More accurate cost determination
– More effective performance evaluation
Activity Analysis
Non-value-added activity
• Increases time spent on
Value-added activity
product or service but does
• Increases worth of
not increase worth
product or service to a
• Unnecessary from customer
• Customer is willing to
• Can be reduced, redesigned
pay for it
or eliminated without
affecting market value or
• Business-value-added
activities are essential
Cost Driver Analysis
• Cost drivers are factors that have a direct
cause-effect relationship to a cost
– Limit the number of cost drivers
– Cost of measurement should not exceed
benefit of using the cost driver
– Easy to understand
– Directly related to activity being performed
– Appropriate for measurement
Cost Driver Analysis
• Unit-level costs
– direct material, direct labor
• Batch-level costs
– setup, inspection
• Product/process-level costs
– engineering changes, product development
• Organizational or facility costs
– building depreciation, plant manager’s salary
Activity-Based Costing
• Recognizes several levels of costs
• Accumulates costs into related cost pools
• Uses multiple cost drivers to assign costs
to products and services
Two-Step Allocation
• Collect costs in general ledger and subsidiary
• Identify activity centers
• Accumulate costs into activity center cost
pools – cost drivers
• Allocate costs to products and services
– activity driver measures demands placed on
activities, thus, the resources consumed by
Traditional vs. ABC Costing
• When ABC is implemented
– Cost is reduced for high volume,
standard products
– Cost is increased for low-volume,
complex specialty products
Use ABC Costing for.
1. Product Variety and Process Complexity
– Caused by mass customization
• Too many choices, opportunity for errors
• Pareto Principle
• Commonality of parts
– Reduced by
• Simultaneous (or Concurrent) Engineering
• Design for Manufacturability
Use ABC Costing when….
2. Lack of Commonality in Overhead Costs
Some products/services use substantially more
overhead than others
3. Problems with Current Cost Allocations
Significant changes in process with no change in
cost allocations
Expense majority of period costs when incurred
Use ABC Costing when….
4. Changes in Business Environment
– Increase in competition
– Change in management strategy
Continuous Improvement
• Eliminates non-value-added activities to reduce
cycle time
• Makes products/performs services with zero defects
• Reduces product costs on an ongoing basis
• Simplifies products and processes
ABC Costing Supports
Continuous Improvement
Criticisms of ABC
• Significant amount of time and cost
to implement
• Must overcome barriers to change
• Does not conform to GAAP
Advantages of ABC and ABM
• Identify and monitor significant technology
• Trace technology costs directly to products
• Increase market share
• Identify the cost drivers that create or
influence cost
• Identify activities that do not contribute to
perceived customer value
Advantages of ABC and ABM
• Illustrate the impact of new technologies on
all elements of performance
• Translate company goals into activity goals
• Analyze the performance of activities across
business functions
• Analyze performance problems
• Promote standards of excellence
• What are the differences between activitybased costing and traditional cost
• What are cost drivers and activity drivers?
• What are two advantages and two criticisms
of activity-based costing?
Potential Ethical Issues
• Ignoring non-value added activities
• Using non-value label to eliminate jobs
• Misclassifying activities to allocate costs
away from lower volume products to justify
lower selling prices
• Selecting an inappropriate cost driver to
distort cost calculations
Potential Ethical Issues
• Using ABC to eliminate a vendor or
• Using ABC to eliminate funding of social or
environmental causes
• Using ABC to transfer cost from fixed price
contracts to cost-plus contracts