chapter 8 - 8 Chapter Eight Activity-Based Costing: A Tool...

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Activity-Based Costing: A Tool to Aid Decision Making 8 Chapter Eight After studying Chapter 8, you should be able to: 1. Understand activity-based costing and how it differs from a traditional costing system. 2. Assign costs to cost pools using a first-stage allocation. 3. Compute activity rates for cost pools. 4. Assign costs to a cost object using a second-stage allocation. 5. Prepare a report showing activity-based costing margins from an activity view. 6. (Appendix 8A) Prepare an action analysis report using activity-based costing data and interpret the report. LEARNING OBJECTIVES
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Bank of America Focuses on Profitability Some companies track how much their customers spend on their products and how much it costs to serve these customers. Profitable customers are carefully nurtured. Unprofitable cus- tomers may be let go. For example, “ Bank of America calculates its profits every month on each of its more than 75 million accounts . . . By wading through all that data . . . BofA is able to zero in on the 10% of households that are most profitable. It assigns a financial adviser to track about 300 ac- counts at a time. Their job: to answer questions, coordinate the bank’s efforts to sell more ser- vices, and—perhaps most important—watch for warning flags that these lucrative customers may be moving their business elsewhere . . . . The heavy intervention seems to be working . . . [C]ustomer defections are down, and account balances in the top 10% have grown . . . ” Source: Paul C. Judge, “What’ve You Done for Us Lately?” Business Week, September 14, 1998, pp. 140–146. BUSINESS FOCUS S
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316 Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making In Business T he cost accounting systems described in Chapters 2, 3, and 4 were designed primarily to provide unit product costs for external reporting purposes. Variable costing, which was described in Chapter 7, is intended to provide managers with product costs and other information for decisions that do not affect fixed costs and ca- pacity. Another method called activity-based costing has been embraced by a wide vari- ety of organizations including American Express, The Association of Neurological Surgeons, Cambridge Hospital Community Health Network, Carrier Corporation, Dana Corporation, Dialysis Clinic, GE Medical Systems, Hallmark, Harris Semi-Conductor, ITT Automotive North America, Maxwell Appliance Controls, Pillsbury, Tampa Electric Company, and the U.S. Postal Service. Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs. Activity-based cost- ing is ordinarily used as a supplement to, rather than as a replacement for, the company’s usual costing system. Most organizations that use activity-based costing have two costing systems—the official costing system that is used for preparing external financial reports and the activity-based costing system that is used for internal decision making and for managing activities.
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chapter 8 - 8 Chapter Eight Activity-Based Costing: A Tool...

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