1. Foundations and Evolutions
Cost Accounting
Foundations and Evolutions
Kinney and Raiborn
Seventh Edition
Chapter 4
Activity-Based Management and
Activity-Based Costing
COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

2. Learning Objectives (1 of 2)
Identify value-added versus non-value-added activities
Explain how value-added and non-value-added activities effect manufacturing cycle efficiency
Explain why cost drivers are designated in activity-based costing

3. 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

4. Activity-Based Management
Focuses on activities during production and performance process
Improves the value received by customers
Enhances profitability

5. Activity
An activity is a repetitive action performed in fulfillment of a business function

6. Activity-Based Management
Operational control
Quality management
Business process
improvement
Performance measurement
Activity analysis
Cost driver analysis
Activity-based costing
Continuous improvement

7. Activity Based Management
External Benefits
Increased customer value
Enhanced profitability
Internal Benefits
More efficient production
More accurate cost determination
More effective performance evaluation

8. Activity Analysis Non-value-added activity
Increases time spent on product or service but does not increase worth
Unnecessary from customer perspective
Can be reduced, redesigned or eliminated without affecting market value or quality
Business-value-added activities are essential
Value-added activity
Increases worth of product or service to a customer
Customer is willing to pay for it

9. 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

10. 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

11. 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

12. Two-Step Allocation
Collect costs in general ledger and subsidiary accounts
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 products/services

13. 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

14. Use ABC Costing for. 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

15. Use ABC Costing when…. Lack of Commonality in Overhead Costs
- Some products/services use substantially more overhead than others
Problems with Current Cost Allocations
- Significant changes in process with no change in cost allocations
- Expense majority of period costs when incurred

16. Use ABC Costing when…. Changes in Business Environment
Increase in competition
Change in management strategy

17. 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

18. Criticisms of ABC Significant amount of time and cost to implement
Must overcome barriers to change
Does not conform to GAAP

19. Advantages of ABC and ABM
Identify and monitor significant technology costs
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

20. 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

21. Questions
What are the differences between activity-based costing and traditional cost accounting?
What are cost drivers and activity drivers?
What are two advantages and two criticisms of activity-based costing?

22. 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

23. Potential Ethical Issues
Using ABC to eliminate a vendor or customer
Using ABC to eliminate funding of social or environmental causes
Using ABC to transfer cost from fixed price contracts to cost-plus contracts