Free Essay

Abc Capacity Summary

In: Business and Management

Submitted By cpameiling0527
Words 714
Pages 3
Summary for Activity-Based Costing and Capacity In this article written by Robert Kaplan, Activity -Based Costing method has been upgraded to a level that can better assist the need for an organization. The article began with the introduction of traditional Activity-Based Costing method, along with the emphasis on its two major pitfalls: lack of future elements and actual capacity levels. Then the author suggested two solutions to conquer the pitfalls by using budget cost and practical capacity to calculate Activity -Based Costing. I will attach some personal experience at the end of this summary to address my learning experience for this article. At first, the author summarized the basic steps of calculating activity-based activity: starting with the tracing the resource expense to activities, followed with obtaining the quantitative data on the output of each activity, ended with measuring how much of each activity's output was used by each product or customers. However, based on this historical method, the author pointed out there are two major pitfalls existed in this traditional ABC system. One is the actual cost-driver rate is not able to be calculated until the period is over, which leading the cost manager to be questioned by its ability to predict future cost by using the same system. The other pitfall is the cost -driver rate in traditional ABC system is not accurate when the resources performing the activity is under full capacity, which leading the cost of the resources to be allocated unfairly among activities. To solve the first pitfall of traditional ABC, the author suggested using the budged expenses for resources in the upcoming period to estimate the cost for the activity. By implemented this new steps, a ABC system enables the cost manager pro-actively to estimate the cost of activities that will be performed in current and future periods. Ultimately, the new system using budged expense to help the manager to make decisions with more relevant data in the current and future periods. To solve the send pitfall of the traditional ABC, the author suggested using practical capacity of the resources supplied instead of actual recourses supplied. This is the main discussion part of the article. To explain the inaccuracy embedded in the old system, the author first pointed out the fixed cost for the resources will remain the same indecently from the change of production level. The efficiency of the activity will remain the same despite of the order volumes. This means the cost-driver rate should reflect the same efficiency of the process- how the cost is being handled for each customer order. Based on the calculations, managers can either reduce the supply of resources for performing the activity or increase the quantity of revenue-generating activities performed by the resources. The author provided us a very detail explanation for how to apply the practical capacity in real life operations. First we have to identify the difference between practical capacity and theoretical capacity. In the scenario of unused capacity arising from the lumpiness of asset acquisition, we will only use the actual capacity as the practical capacity instead of the real capacity of the machine's production level. Even in a more variation case that the demand is expected to build over time; we should use the same practical capacity (maximum level) as the denominator volume and assign the unused capacity to the investment account or written off as unused capacity. In the scenario of seasonal and peak-load demands, we should use the actual capacity and cost for the slack-demand period, and use the unused cost+ the actual cost/actual unit to calculate the peak period driver rate. The unused cost can be assigned to the activity that actually required the cost instead of among all activities in a flat rate. In conclusion, the unused cost can be assigned to the activity that actually required the cost instead of among all activities in a flat rate by using practical capacity. Managers can now better judge the efficient of each product line and make better decisions based on the more accurate ABC system. I personally think it is a very reasonable and functional upgrade for the traditional ABC system by implementing the budgeted expense and practical capacity into the new ABC calculation.

Similar Documents

Premium Essay

Capacity

...Capacity- The upper limit on the load that an operating unit can handle Design capacity- Maximum output rate of service capacity an operation, process, or facility is designed for. Effective Capacity-Design capacity minus allowances such as personal time and maintenance. Efficiency-Actual output / Effective capacity X 100% Utilization- Actual output / Design capacity X 100% Factors Facilities 1.Design 2.Location 3.Layout 4. Environment Product/Service 1.Design 2.Product or service mix Process 1.Quantity capabilities 2.Quality capabilities Human Factors 1.Job Content 2.Job Design 3.Training and experience 4.Motivation 5.Compensation 6.Learning Rates 7. Absenteeism and labor turnover Policy Operational 1.Scheduling 2.Materials Management 3.Quality Assurance 4.Maintenance Policies 5.Equipment Breakdowns Supply Chain External Factors 1.Product standards 2.Safety regulations 3.Unions 4.Pollution control standards Capacity Cushion- Which is an amount of capacity in excess of expected demand when there is some uncertainty about demand Economies of Scale-If the output rate is less than the optimal level, increasing output decreases unit cost Diseconomies of Scale- If output is increased beyond optimal level avg unit costs would become larger. Present Value- Expresses in current value the sum of all future cash flows of an investment proposal Cash Flow-The diff between cash received from sales and other sources and cash outflow for labor,......

Words: 1450 - Pages: 6

Premium Essay

Capacity

...Capacity to contract One of the essentials of a valid contract, mentioned in section 10, is that the parties to the contract should be competent to make the contract. According to section 11 : “Every person is competent to contract who is of age of majority according to law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.” It means that the following three categories of persons are not competent to contract. 1. A person who has not attained the age of majority, i.e., one who is minor. 2. A person who is of unsound mind 3. A person who has been disqualified from contracting by some law. Although the above mentioned categories of persons are not competent to contract, yet they may sometimes be making some bargains, taking some loans, or be supplied with some goods by third parties, or be conferred with some benefits etc., the position of such person in such like situations is being discussed below. THE POSITION OF A MINOR Who is a minor ? A person who has not attained the age of majority is a minor. Section 3 of the Indian Majority Act, 1875 provides about the age of majority. It states that a person is deemed to have attained the age of majority when he completes the age of 18 years, except in case of a person of whose person or property a guardian has been appointed by the Court in which case the age of majority is 21 years. Nature of a minor’s agreement As noted......

Words: 6033 - Pages: 25

Premium Essay

Abc in the Public Sector

...it may become an absolute requirement to retain the tax base. This restriction creates more reasons to understand costs. ABC/M and its integration with strategy mapping and balanced scorecards (i .e., performance measures) offer potential solutions to the problem . Providing meaningful, fact-based information to government office managers and employee teams can be a cost-effective means of bringing about benefits change and improved performance in government and not-for-profit environments. Intuition and political persuasion are becoming less effective as means for decision making. The reference to the cost of outputs will repeatedly resonate throughout this paper. It is inescapable. The need to consider outputs – not simply the level of manpower, equipment and supplies – is what is forcing the awareness and acceptance of ABC/M. At a very basic level, ABC/M is simply a converter and translator of expenditures restated as outputs, and more specific the costs of outputs. ABC/M answers fundamental questions such as “What do things cost?” and “Why?” It answers “Why?” by displaying the drivers of activity costs. It also answers the questions “Who receives the costs?” and “How much of the costs did they each receive?” Examples of output costs are the cost per each type of processed tax statement or the cost per each type of rubbish disposal pickup. ABC/M serves as a calculation engine that converts employee salaries, contractor fees and supplies into outputs. The work......

Words: 4153 - Pages: 17

Premium Essay

Abc Priority

...of newly emerging activity-based cost (ABC) systems. TVaditional cost systems use volume-driven allocation bases, such as direct labor dollars, machine hours, and sales dollars, to assign organizational expenses to individual products and customers. But many ofthe resource demands by individual products and customers are not proportional to the volume of units produced or sold.^ Thus, conventional systems do not measure accurately the costs of resources used to design and produce products and to sell and deliver them to customers. Companies, including those with excellent traditional cost systems,^ have developed activity-based cost systems so that they can directly link the costs of performing organizational activities to the products and customers for which these activities are performed. ments.^ The following equation, defined for each major activity performed by the organization's resources, formalizes this relationship: Activity Availability = Activity Usage + Unused Capacity A simple example illustrates the difference between the cost of resovirces supplied and the cost of resources used to perform activities. I. ABC SYSTEMS AS RESOURCE USAGE MODELS Activity-based cost systems estimate the cost of resources used in organizational processes to produce outputs.^ Many people have attempted to interpret activity-based costs using their more familiar fixed versus variable cost framework, an interpretation inconsistent with an ABC system's measurements of resource......

Words: 8179 - Pages: 33

Free Essay

Capacity

...Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its product. In the context of capacity planning, design capacity is the maximum amount of work that an organization is capable of completing in a given period. Effective capacity is the maximum amount of work that an organization is capable of completing in a given period due to constraints such as quality problems, delays, material handling, etc. The phrase is also used in business computing as a synonym for capacity management. There are four procedures for capacity planning; capacity planning using overall factors (CPOF) capacity bills, resource profiles, and capacity requirements planning (CRP). The first three are rough-cut approaches (involving analysis to identify potential bottlenecks) that can be used with or without manufacturing resource planning (MRP) systems. CRP is used in conjunction with MRP systems. Capacity using overall factors is a simple, manual approach to capacity planning that is based on the master production schedule and production standards that convert required units of finished goods into historical loads on each work center. Bills of capacity is a procedure based on the MPS. Instead of using historical ratios, however, it utilizes the bills of material and routing sheet (which shows the sequence or work centers required to manufacture the part, as well as the setup and run time). Capacity requirements can then be......

Words: 456 - Pages: 2

Premium Essay

Abc Abc

...greatest opportunity to create or destroy value, and it is to strategy that the most accomplished leaders pay most attention. This is not to say that operational efficiency and effectiveness are of little concern. They most emphatically are, since no organization can deliver strategic objectives for long without them. In successful breakout companies, strategy is deeply rooted and inseparable from all matters bearing crucially upon business performance. The distinction between what is operational and what is strategic is rarely clear cut. 7 The five most essential breakout strategy practices identified though our work, in summary, are as follows: 1. Pursuit of a corporate vision that is both inward and outward looking and grounded in a realistic assessment of current possibilities and capabilities. We hold that successful breakout leaders have the capacity to articulate a vision of what the company might become a few years down the line with respect to its market position, internal organization, external relationships and corporate culture. Such visions go beyond the realm of aspirations because they recognize current constraints and difficulties and serve thereby in setting a realistic agenda for change. Corporate visions that differentiate between winners and losers also need to go beyond old notions and slogans that are more form than substance. Pursuit of a unified corporate vision is both a more encompassing activity, and a process that many companies approach......

Words: 103858 - Pages: 416

Premium Essay

Abc-Improvement-Results

...activity-based costing and improvement in financial performance Douglass Cagwin* and Marinus J. Bouwman† This study investigates the improvement in financial performance that is associated with the use of activity-based costing (ABC), and the conditions under which such improvement is achieved. Internal auditors furnish information regarding company financial performance, extent of ABC usage, and enabling conditions that have been identified in the literature as affecting ABC efficacy. Confirmatory factor analysis and structural equation modelling are used to investigate the relationship between ABC and financial performance. Results show that there indeed is a positive association between ABC and improvement in ROI when ABC is used concurrently with other strategic initiatives, when implemented in complex and diverse firms, when used in environments where costs are relatively important, and when there are limited numbers of intra-company transactions. In addition, measures of success of ABC used in prior research appear to be predictors of improvement in financial performance. c 2002 Elsevier Science Ltd. All rights reserved. Key words: activity-based costing; new business initiatives; ABC success; structural equation models. 1. Introduction Activity-based costing1 (ABC) has been promoted and adopted as a basis for making strategic decisions and for improving profit performance for over a decade *Assistant Professor of Accounting, School of Business, University of Texas at......

Words: 17068 - Pages: 69

Premium Essay

Capacity

...food and shelter then there would have been legal ground to stand on. 13-3 - Capacity A widowed seventy-five-year-old woman named Joanne survives on a fixed budget and has recently become forgetful. Her family fears she has Alzheimer’s but no doctor has diagnosed her with this illness and no court has ruled on her legal competence. Joanne goes to a piano store one day and purchases a piano on installment. The next day when it is delivered, she tells the delivery person she has no recollection of making such a purchase. Is this contract void, voidable, or valid? A contract will be void “if a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the individual” (Clarkson, Miller, & Cross, 2012, p. 239), therefore any contact that person enters into is void – meaning it does not exist. If a court has not determined that a person is mentally incompetent “but in fact the person was incompetent at the time the contract was formed, the contract may be voidable.” This occurs when the person either did not know they were in fact entering into a contract agreement or they lacked the mental capacity to understand the “nature, purpose, and consequences.” (Clarkson, Miller, & Cross, 2012, p. 240) A contract may be valid if entered into by a person who is mentally incompetent without ruling of their competence by a court, but who had “capacity at the time the contract was formed.” (Clarkson, Miller, & Cross,......

Words: 1899 - Pages: 8

Free Essay

Capacity Building vs Capacity Development

...Capacity Building Versus Capacity Development in Healthcare Soumya Vyas Student, Institute of Health Management Research, Jaipur, India Capacity building is not a new concept in healthcare. Every innovation has been evidently supported by Capacity Building to establish effective healthcare systems. The term was improvised by UNDP in 1991 as Community Capacity Building which gave its application in three levels namely individual, institutional and societal. This concept immediately brings to mind ideas like training, financial or technical aid, etc. Although it has been an essential and effective approach, there is possible scope for betterment using Capacity Development. It can be explained as the process of obtaining, strengthening and maintaining the capabilities at all the three levels to set and achieve their own development objectives over time. Although the distinction between the two is minute, the adaption of the latter where necessary can bring about considerable change and effect. Development zooms in on the exiting features than can be transformed into capabilities. Instead of introduction of the lacking, capacity development helps realise an alternate route to the same objective using unrelated but pre-existing features. The study will elaborate on the example of such from the healthcare field explaining how new measures can be evolved to realise basic goals. One of the most profound issues in healthcare in India is the budget crunch and Capacity Development......

Words: 276 - Pages: 2

Premium Essay

Capacity

...Deadline: 19th November 2015 Clever Unisex Wear Ltd Background of the Organization: Clever unisex wear is a shop in Aradippou, Larnaca and it was established on the 02nd of September 2013. Is a very popular shop in Larnaca due to the good advertisement that they do and also by sponsoring some events such as cultural and philanthropic. They also organized a fashion show with some famous actors and actress. During the fashion shows they offered 50 and 60 % discount .Due to the discount offered the sales have been increased. Moreover they tried to satisfy their customers by selling good quality product in affordable prices and they also tried to avoid the mistakes that other shop owners used to do. In order to achieve an effective capacity they use the SWOT analysis method. The SWOT analysis of a company is about the Strengths, Opportunities, Weaknesses, and Threats of the company. What they try to do is actually to increase their strengths (for example makes more events) and find where is their opportunity to growth (for example if they are in the perfect place). What is more, they try to find their threats (for example threat from another shop near to them) and decreased their weaknesses. Demand Definition: Demand of a product is when we want a product and we can afford it and also we plan to buy it. (Parkin, Powell and Matthews, 6th edition).The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a......

Words: 1262 - Pages: 6

Free Essay

Abcs

...Kyesha Buckham  English 96  Wanda Haynes  Achieve Your Dreams­Remember Your ABC’s      I never had  that inner voice that pushed me to get to my goals. So because of that I had  to build my inner self motivation and the way I did that was by creating  my own quotes I can  use to motivate myself . “To achieve your dreams remember your abcs “ the title is very literal.  Wanda Carter gave words of wisdoms to live by in a very creative way. She used a skill that we  all knew our ABCS, and provided us with phrases and terms not many of us know how to  achieve and understand. Within each line a message is told, that I myself can very well relate to .  Take your own advice and stay positive  in your path of success . That statement alone  explains the message that Wanda Carter wanted her audience to receive. Her first line and one of  the most important was “Avoid negative sources, people, things and habits”. Everyone has ideas,  inspirations and goals that they want to reach. When those ideas are shared negative feedbacks  and criticism are always thrown out that most people do not know how to handle. This poem is  more like a how to , steps to reach  success. With these  phrases people that need a little push  will feel like their in control . As stated in the last line “ Zero in on your target , and go for it”.  All of us need some type motivation and strength to push us to succeed, as Wanda Carter  writes, “ Understand yourself in order to better understand o......

Words: 714 - Pages: 3

Premium Essay

Hospital Abc Case Study

...1.0 Recruitment & Retention Plan Recruitment refers to the process of attracting, screening and selecting qualified people for a position within an organization (Sheryl & Amy, 2012). According to the case study, the major issue is the difficulty in attracting new employees. To be more specific, Hospital ABC found that there are still vacancies in critical areas that have yet to be filled up. Even with extended block, the Hospital will have difficulty attracting good employees as there are many other private hospitals competing for the same pool of talent. These hospitals are not afraid to pay above average market rates to secure these employees. Organizations within the healthcare industry are competing for qualified applicants to safeguard future growth. As such, there is a need for organizations to analyze the existing market competition for talent and create the corresponding responses in terms of competitive reward packages. The recruitment policies of the competitors also affect the recruitment function of the organizations. To face the competition, many organizations have to change their recruitment policies according to the policies being followed by the other competitors. The recruitment policy of an organization states the objectives of recruitment and provides a structure for implementation of recruitment program. Of primary importance is to ensure the organization’s recruitment plan is reaching out to the right talent pool in filling open roles. At the same......

Words: 5489 - Pages: 22

Free Essay

Abc Analysis

...Telefon: 0203 379-2785 Telefax: 0203 379-3048 eMail: bernd.noche@uni-due.de Prof. Dr.-Ing. Bernd Noche ABC-/XYZ Analysis Introduction tul Quelle: Powerpoint-Folien: Uta Horstmann ABC-Analysis 2 M0000 A short definition of ABC-Analysis The ABC-Analysis represents a simple method of material classification in respect of value and quantity. (G. Wöhe) Expressed in a more general way it is a process in order to identfy important kinds of customers, suppliers or articles. 3 ABC-Analysis M0000 The Pareto principle The so called Pareto principle indicates that for many phenomenons the following is valid: 80 % of effects are reached by 20 % of causes. The principle traces back to Vilfredo Pareto (Italian economist) who, related to Italy, had noticed that 80 % of property belonged to 20 % of the Italian population. Vilfredo Federico Damaso Pareto 1848 - 1923 4 ABC-Analysis M0000 However, the rule often is misunderstood: It seems that 80 % + 20 % = 100 %. But it can also be valid that: 80 % of effects are traced back to 10 % of causes. The principle can also be applied recursively, and not only used for 20% of the reasons : e.g. 64-4 Rule: 96-36 Rule: 64-4 Rule: 51,2-0,8 Rule: e. g. (80 – 16) %  (20 – 16)% e. g. (80 + 16) %  (20 + 16)% e. g. from (80•80/100)% - (20•20/100)% e. g. from (80•80•80/10000)% - (20•20•20/10000)% Source: Wikipedia 5 ABC-Analysis M0000 ABC classification Cumulated Value percentage 100 or Percentage share 90 of......

Words: 2735 - Pages: 11

Premium Essay

Cost and Management Accounting - Abc Ltd Has Collected the Following Data for Its Two Activities. It Calculates Activity Cost Rates Based on Cost Driver Capacity

...Of 50 kgs in chemical C was noticed due to breakages. At Mumbai, the manufacture paid octroi duty @ 0.20 kg. He also paid hamali, Rs 20 for the chemical a, Rs 58.12 for chemical B and Rs 35.75 for chemical C. Calculate the stock rate that you would suggest for pricing issue of chemicals assuming a provision of 4 % towards further deterioration and also show the quantity (kgs) of chemicals available for issue. 2. ABC Ltd has collected the following data for its two activities. It calculates activity cost rates based on cost driver capacity. Activity Cost driver Capacity Cost Power Kilowatt hours 50000 hrs Kilowatt Rs 200000 Quality Inspection Numbers of inspection 10000 inspection Rs 300000 The Company makes three products, A, B and C.For the year ended March 31, 2004, the following consumption of cost drivers was reported: Product Kilowatt-hours Quality Inspection A 20000 7000 B 40000 5000 C 30000 6000 Compute the costs allocated to each product from each activity Calculate the cost of unused capacity for each activity. 3. Reliable company wishes to discontinue the sale of one of the products in vew of unprofitable operations. Following details are available with regard to turnover, cost and activity for the current year ending 31st March. Products P Q R S Sales Turnover Rs.600000 Rs.1000000 Rs.500000 Rs.900000 Cost of sales 350000 800000 370000 480000 Storage area......

Words: 903 - Pages: 4

Premium Essay

Abc System

...C H 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......

Words: 26371 - Pages: 106