Ch05 - CHAPTER 5 Activity-Based Management and...

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CHAPTER 5 Activity-Based Management and Activity-Based Costing Questions 1. Activity-based management is a management approach that associates the activities executed by an organization with the value customers derive from products. Efficiency and effectiveness are achieved by reducing the level of activities that do not create value for the customer and by improving execution of activities that do create customer value. Specific tools beneath the ABM umbrella include activity analysis, cost driver analysis, activity-based costing, continuous improvement, operational control, performance evaluation, and business process reengineering. 2. Value-added activities are viewed from the customer's perspective because it is the customer who is the end evaluator of the “worth” of a product or service and, therefore, the activities involved in creating that product or service. 3. In a televised football game, the value- added activities are the actual game plays. Non-value-added activities consist of commercials and the time between plays. Activities such as “moving the chains,” measuring to determine if a first down was made, moving the ball from the end of one play to the point where it will be put in play next are all non-value-added activities. People who believe that the commercials are informative and interesting and that the time between plays allows them an opportunity to examine the strategies of the teams and project what each team is likely to do play may disagree with this assessment. 4. Yes, cost drivers exist in traditional accounting systems although they are called "bases for allocation." In traditional systems, a single cost driver such as direct labor hours or machine hours is commonly used rather than multiple cost drivers. Also in traditional systems, volume-based cost drivers are more the norm than non-volume-based (e.g., square footage) cost drivers. Finally, traditional accounting stresses finding an allocation base that demonstrates strong statistical correlation to the cost, but ABC emphasizes searching for multiple cost drivers that bear cause-and-effect relationships to the cost. 5. Activity analysis is used to separate activities into two groups: those that add value to the product or service and those that do not add value. Once the non- value-adding activities are identified, managers seek to reduce or eliminate the level of the drivers of those activities. If such efforts are successful, non-value- adding costs will be reduced without impairing the value of products or services to the consumer. The result should be an increase in profits. 6. By using a single cost pool and a single cost driver to allocate overhead, the more traditional methods of overhead assignment ignore the influence on cost of the different activities that occur to make a product. In this manner, low-volume specialty products, which cause a disproportionate amount of overhead, are only assigned an average charge for overhead, thereby shifting costs to the
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This note was uploaded on 02/28/2009 for the course ACCTG 1 taught by Professor Lupin during the Spring '09 term at De La Salle Lipa.

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Ch05 - CHAPTER 5 Activity-Based Management and...

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