030310_for_posting - Using ABC to target process...

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Using ABC to target process improvements Activity-based management used in conjunction with ABC can identify areas that would benefit from process improvements. e.g., if 43% of a nursing unit’s total operating costs is related to medication and much of the time spent on that is in deciphering physicians’ orders, then invest in technology that eliminates the problem (p. 266 of text) Companies can compare (benchmark) their activity cost information to successful nation- wide or global companies in their industry. Kattelus -Spring 2010 1
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1. Identify each activity in a business process and estimate its total indirect costs (cost pool). (First- stage) 2. Identify a cost driver for each activity. Then estimate the total quantity of each driver (allocation base). 3. Compute the cost allocation rate for each activity. 4. Allocate indirect costs for each activity to the cost object. (Second-stage) 5. Add the indirect costs just computed for each cost object to its prime costs (direct materials and direct labor). Review: How to develop an ABC system Kattelus -Spring 2010 2
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Flatiron Co. uses an Activity-Based Costing (ABC) system with 3 activity cost pools. The company has provided the following data: Manufacturing overhead costs ………. .…$440,000 Selling and administrative expenses …. ..$240,000 Total ……………………………………………………$680,000 Distribution of resource consumption for cost pools: Complete the first-stage allocation of costs to the Order Size pool? A. $204,000 B. $289,000 C. $314,000 D. $374,000 Kattelus -Spring 2010 3 Order size Customer support Other Total Manufacturing O/H 55% 35% 10% 100% 30% 50% 20% 100%
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Lean Thinking Model, Activity-Based Management, and ABC In Chapter 1, the Lean Thinking Model (p. 13) used by managers is an approach that identifies the value to customers in specific products and services. Managers attempt to reduce non-value added steps (from the customer’s perspective) in the production process. Activity-based management evaluates the costs and values of process activities to identify opportunities for improved efficiencies. Activity-based costing systems deliver information to use in strategic management decisions about eliminating products, changing product mix, engineering changes in processes, investing in new equipment or software. Kattelus -Spring 2010 4
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On non-value added activities Which of the following are non-value-added activities? A.Moving goods B.Storing goods C.Inspecting finished goods D.Reworking a defective product E.All of the above. Kattelus -Spring 2010 5
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Product Product A B Total Sales 2,660,000 $ 540,000 $ 3,200,000 $ Total costs 1,753,750 589,500 2,343,250 Product margins 906,250 $ (49,500) $ 856,750 $ Less costs not assigned to products: Customer relations 367,500 Other 490,500 Total 858,000 Net operating loss (1,250) $ Demonstration: reconciling NOI under ABC and traditional costing 6 Kattelus -Spring 2010
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This note was uploaded on 10/17/2011 for the course ECON 101 taught by Professor Thompson during the Spring '11 term at Michigan State University.

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030310_for_posting - Using ABC to target process...

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