...CHAPTER 5 ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT LEARNING OBJECTIVES 1. Explain undercosting and overcosting of products or services 2. Present three guidelines for refining a costing system 3. Distinguish between the traditional and the activity-based costing approaches to designing a costing system 4. Describe a four-part cost hierarchy 5. Cost products or services using activity-based costing 6. Use activity-based costing systems for activity-based management 7. Compare activity-based costing systems and department-costing systems 8. Evaluate the costs and benefits of implementing activity-based costing systems CHAPTER OVERVIEW Chapter 5 emphasizes the allocation of indirect costs within a costing system. Companies need to accurately measure resources used in producing different products and providing different services. Tracing costs in an economically feasible way to products and services is not the difficult part of assigning costs. Allocating indirect costs provides the challenge. Companies produce an increasing variety of products and services and have ever-increasing amounts of indirect costs to allocate to them. A costing system provides managers with information for many different purposes, with one important purpose, accurate costs of products or services. Costing systems may need to be refined for accurate measurement of consumption of indirect costs. Activity-based costing (ABC) assists some companies in cost management decisions...
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...DBS Consulting Services, using the Activity-Based Costing system (ABC) and the conventional costing system based on computing hours. ABC provides more detailed and accurate information than the conventional costing system because ABC is based on consumption of resources by production of a product or service line and focuses on the activities that drive costs, recognising that activities consume resources. The conventional method allocates overhead costs based on hours consumed (in this case computing hours), which may not represent the actual consumption of indirect resources expended by the service. A costing system should provide information to help minimise waste, but should not be wasteful in it-self . The resources required to design, implement and maintain a costing system should be less than the benefit derived from the use of the system. This report is to compare the conventional costing system against an ABC System for DBS Consulting Services and will discuss the following: 1. ABC improving costing accuracy 2. Profitability of DBS Consulting Service using conventional costing procedures and ABC 3. Recommendation of the adoption of ABC based the results conventional costing and ABC 4. Aggressive expansion? 5. Factors to be taken into account when implementing ABC 6. How to encourage positive reactions. 1. ABC IMPROVING COSTING ACCURACY ABC is said to improve costing accuracy when compared with conventional costing procedures. ABC is a managerial accounting...
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...ACTIVITY-BASED COSTING 2 The use of Activity-Based Costing (ABC) in the manufacturing of automobiles can have a great benefit for tracking costs that are actually used in the process of manufacturing a certain type of auto. ABC has an impact in job costing when the process is complex and there are many machines or processes used in manufacturing (Activity Based Costing, n.d.). Using the instance of automobile manufacturing, some signs of ABC being a beneficial method can include the ability for management to effectively use cost analysis in their decision-making on a certain model of automobile. By having the ability to track costs directly to the line of auto management can compare the manufacturing costs to the autos’ profit margins and determine if the line of auto is a money maker for the company, and if the product should continue to be offered in the manner in which it is currently manufactured at the price point it is offered to the consumer. Another sign of appropriately using ABC is the ability of the company to review and focus on methods for cost reduction of the auto. ABC allows the manufacturer to precisely pinpoint cost of materials, machines, and processes used to manufacture the auto. In doing so, this can give management guidance to where costs could be reduced in order to gain maximum profit from a product line. Managers should have a concern when it comes to broad averaging of costs. Broad...
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...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 numbers generated by ABC, by themselves, enough to guide managers to correct decisions regarding resource use? 3. How does one know that activity-based methods of cost management are worthwhile? B. Learning Objectives — This chapter has six learning objectives. 1. The key steps of an activity-based management system are presented. 2. How to use activity-based costing for target costing. 3. Ways to identify and measure the costs of activities that do or do not add value in organizations. 4. How the elements of an ABM system can help to identify opportunities for process improvements. 5. Evaluate capacity utilization by identifying resources supplied and resources used. 6. Understand the methods and the problems of implementing ABC and ABM. C. Activities-based Management (ABM) allows managers to evaluate costs and values of process activities to identify opportunities for improved efficiency...
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...quality management, customer satisfaction, cost, quality and time, technology, market globalization, availability of capital and markets, and finally activity based costing. The purpose of this study is to summarize and analyze the implementation of ABC in the banking industry. Total quality management (TQM) is a process of continuous improvement that focuses on increasing customer satisfaction. TQM is founded on the principle that every customer (internal or external) has a set of spoken or latent needs or requirements. The ultimate objective of TQM is to improve the horizontal linkage of operations to produce a product or service. ABC is a fundamental factor in implementing TQM. The implementation of TQM is greatly facilitated by analyzing organizational activities, linking activities to business processes, evaluating cost of quality (prevention, appraisal, and failure), and determining customer perception of value (valueadded activities). A value-added activity is required to meet customer requirements, modifies or enhances raw materials, is a critical step in getting the product or service to the customer, and adds value that customer might be willing to pay for. If the activity is determined to be a non-valueadded activity, one of four things should happen: activity reduction, activity elimination, activity sharing, and activity selection. Not only does ABC support total quality management, but it also supports process value analysis and benchmarking. ABC has been used mainly...
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...Company Activity Based Costing Prepared by: Heidi Meilinger Standard System Step 4: Indirect Cost Pool Step 3: Cost Allocation Base Step 5: 439% of direct run labor cost Step 1: Cost objects: Valves, pumps, And flow controllers Step 2: Direct Costs Revised System Step 4: Indirect Cost Pool Step 3: Cost Allocation Base 48% of direct $42.59 per direct manufacturing manufacturing material cost machine hour Step 1: Cost objects: Step 7 Valves, pumps, And flow controllers Step 2: Direct costs Activity Based Costing System Step 4: Indirect cost Pool Step 3: Cost- Allocation Base $25 per hour $16 per hour $155.04 per # $1550.39 per # $2,000 per # $2.78 per Of use per run of transactions of transactions of transactions machine hour Step 1: Cost objects: Valves, Pumps, And flow Controllers Step 2: Direct Costs [pic] [pic] 1. The schedules above show the rates of the valves, pumps, and flow controllers if they were costed using an activity based costing system. With this system there are a total of seven overhead activities, each having...
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...H & R Block is one of the largest and oldest service providers. The company was founded by brothers Henry and Richard Bloch in 1955. The company began franchising in 1956 and they went public in 1962. The company employed over 100,000 tax professionals that are trained both within the U.S. and worldwide. The company has prepared more than 550 million tax returns since the business started in 1955. One key important key to the company success is that they have a retail office within 5 miles of most Americans. You are able to do your taxes both in person and on-line because H & R Block offers these services. The tax-payer can chose to walk into an office and work face-to-face with the tax specialist, they can work totally on their own using the online or packaged do-it-yourself tax prep tools, or they can utilize the do-it-yourself software with unlimited help from and online tax professional. H & R Block will offer you a wide variety of tax consulting services. Straight forward tax return offers the most basic start which is simple. You are able to accomplished this either on-line or in house. H & R Block also offer “drop off” service. A small business service is offered by H & R which includes helping the preparer to navigate the tax requirement of running a business. This is done throughout the year and not just a year-end service. H & R offers a service called “Best of Both”. This is where you get the convenience of doing it online with tax support preparation from...
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...COSTING METHODS Costing methods for Super Bakery University of Phoenix ACC/561 December 19, 2011 Timothy W. Williams, Ph.D. Costing methods for Super Bakery Super Bakery is a virtual corporation created in 1990 by Franco Harris, developing a network of supply for “donuts and other baked goods aimed for the institutional food market” (Kimmel, et al, 2009, pg 867). According to Kimmel, et al (2009), “only the cores, strategic functions of the business are performed inside the company. The remaining activities, selling, manufacturing, warehousing and shipping are outsourced to a network of external companies,” (p.865). Management Strategies The current management strategy was job order based upon the outsourcing of the jobs. While the company was realizing a 20% annual growth rate, management still found that the current system was allowing a wide variation in cost control. (Kimmel, et al, 2009, pg 865).When it was noticed that “orders with high margins were subsidizing orders with low margins” (Kimmel, et al, 2009, pg 867), in the current strategy, the need for a new strategy became apparent. The move to an activity based costing system (ABC) that will show the costs produced by each activity performed rather than the job appears to be the correct choice. Managements Installation of ABC Super Bakery Inc will benefit from the implementation of the ABC system because the costs are tracked by each account in conjunction with performance...
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...RSM 222 Case Assignment Question A1 The chocolate industry is one with many players. There are many custom bar providers as well as big players within the industry. The direct result of that is very high rivalry between competitors within the industry. The internet provides customers with the ease of obtaining information about the various types of chocolate on offer from the many chocolate makers, and that will quite possibly lead to intense price competition between chocolate makers. The indirect result of having many players in the industry is high buyer power. Potential customers have many choices, and are unlikely to show much loyalty towards any chocolate maker. D.C. faces the problem of trying to not only retain its customers but also attract new customers. In the face of these industry forces, D.C. apparently tries to mitigate that by attempting to differentiate it's products from the others. It's strategy appears to be that of trying to create unique and customizable chocolate bars that are most probably uncommon in their current market (European-Styled chocolate bars in an American market), and speed of service. With their inability to compete with larger companies on lowering costs due to their smaller size and resulting lack of economies of scale, they aim to increase the willingness-to-pay of their customers with the novelty, flexibility and speed of delivery of their products. With their focus on the quality and variety of their products, the...
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...Costing System Analysis It can be easily assumed that from the unique and costly nature of producing airplanes Boeing employs a job-costing system, however that is not the case. Long gone are the days when Boeing’s “primary business was producing military aircraft” (Bowlby 1994) as they now have transitioned to focusing on mass producing numerous parts and assemblies for aircrafts across the globe. In an article published on November 1, 1994 titled, “How Boeing tracks costs, A to Z.”, Robert J. Bowlby, the cost management manager at Boeing in Seattle at the time, explains how Boeing transitioned from a traditional job-costing system to a modified process costing system to accommodate this change in product focus. Bowlby explains the transition was catalyzed when two of Boeing’s departments, engineering and operations, informed the finance department that they weren’t getting the appropriate cost information to effectively manage the design and production of the airplanes. Boeing’s traditional job-costing model was ideal for external financial and tax reporting purposes at an airplane model level, but at an operating level, engineering and operations were basing their budgets on very few cost elements. This means that engineering and operations weren’t provided with adequate information to effectively manage costs related to their various processes and operations. The cost information given to individual managers did not coincide with their duties or the areas they were responsible...
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...Problems and Perspectives in Management, Volume 12, Issue 4, 2014 Emmanuel K. Oseifuah (South Africa) Activity based costing (ABC) in the public sector: benefits and challenges Abstract Peter Drucker (1986), in “Management: Tasks, responsibilities, and practices” states that business enterprises and public-service institutions, are organs of society which do not exist for their own sake, but to fulfil a specific social purpose and to satisfy need of society, community, or individual. To achieve the above objectives, managers of these institutions must plan, control and make decisions about the resources entrusted to their care. A key element of efficient organizational decision making is to use reliable information, both operational and managerial accounting data for analysis and decision support. This can be achieved by using activity-based costing (ABC) method. The underlying premise of ABC is that resources are consumed by activities to produce outputs or products and services (US General Services Administration, 2006). It focuses on the allocation of indirect costs to products and services, which was traditionally done on arbitrary basis. ABC is useful in two situations: areas with large and growing indirect and support costs (Krumwiede, 1998a; Becker, Bergener and Räckers, 2010), and areas with a large variety in products, customers and processes (Cooper, 1988a, 1988b; Groot, 1999). The unique characteristic of public sector organizations as overhead-intensive...
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...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...
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...Activity-based costing (ABC) is a costing method that first assigns cost to activities and then assigns them to products based on the products’ consumption of activities (Lanen, Anderson, & Maher, 2011). Activities are tasks that are required in order for a company to finish its product. ABC was first written about by Alexander Hamilton Church in 1901. He believed that overhead was the cost of different activities of production. He believed that in order to report accurate costs, all of the cost of that product, including portions of overhead, should be reflected in the number (Weil & Maher, 2005). It was made popular in 1988 by Robin Cooper and Robert Kaplan. They defined ABC as “an approach to solve the problems of the traditional cost management systems” (Narong, 2009). This system enabled indirect and support expenses to the driven, first to activities and processes, and then to products, services and customers allowing managers to have a better idea of where their company stands (Kaplan, & Cooper, 1998) Foreign companies were beginning to produce items at a lower cost and higher quality than the United States so therefore, companies needed to be able to accurately identify cost-saving strategies (Weil and Maher, 2005). Conventional costing methods allocated overhead based on a direct cost such as labor. The problem with this is that some activities use more overhead resources then others do and companies are unable to identify the actual costs of processes. For...
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...outlet market begun to collapse; prices of raw materials increased sharply; Chinese competitors began to encroach on its low-end and threaten its relationships with key customers together with its pricing pressure from retailers and fabricators. All these factors severely undermined Elkay’s profitability. Since Elkay kept using a traditional standard costing system and analyzed its customer P&Ls within it, managers didn’t take well actions toward the decline in profit for they knew information provided by this system were actually inaccurate and meaningless. Due to Hrudicka’s tireless efforts and successes from two pilot projects, PPD implemented the new Discrete Product Costing by adopting the time-driven ABC system eventually. However, in may 2008, after received report about SKU profitability provided by the new system, the vice president of sales contemplated about taking action towards unprofitable customers. （为20000个顾客提供6000 SKUs products） Problem and issue: The problem that faced by Elkay’s PPD 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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...(i) The differences in the reported cost estimates calculated under each of the two costing systems are significant. This is especially the case with regard to Job order 973. The management accountant’s calculations for the cost estimates produce the following increase/ (decrease) in reported costs: Job order 973 Job order 974 $ $ Unit cost per job under existing system 1,172·00 620·00 Unit cost per job under activity based costing 1,612·00 588·89 Increase/ (decrease) in reported cost 37·54% (5·02) % Job order 973 shows an increase in reported cost of 37·54% [(1,612 – 1,172)/1,172] whereas Job order 974 shows a decrease in reported cost of 5·02% [(88·89 – 620)/620]. A common occurrence when activity-based costing is implemented is that low-volume products show an increase in their reported costs while high-volume products show decreases in their reported costs. This is very much the case with regard to the products which are the subjects of Job orders 973 and 974. The reported costs also differ due to the following: – Job orders 973 and 974 differ in the way they consume activities in each of the five activity areas within SFS’s premises – The activity areas differ in their indirect cost allocation bases. In particular no activity area uses direct labor hours as the basis of allocating indirect costs. Two areas where...
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