Chapter 3

Chapter 3 - Activity-Based Management Maher 10e Chapter 3 1...

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Unformatted text preview: Activity-Based Management Maher 10e Chapter 3 1 Learning Objectives 1. Identify strategic & operational uses of activity- based management (ABM). 2. Differentiate between traditional cost allocation methods & activity-based costing (ABC). 3. Understand the concept of ABC. 4. Identify steps in ABC. 5. Distinguish between resources used & resources supplied; measure unused resource capacity. 2 Traditional Volume-Based Allocation • When manufacturing overhead represented a small part of product cost, activity bases such as direct labor hours, direct labor dollars, or machine hours were used to apply overhead costs to products. • Do not consider Economies of Scale (savings a company realizes in unit costs by spreading fixed overhead costs over a larger number of units) – Volume diversity: If a company produces more than one type of product, some products are likely to be produced in higher volume than others. • Allocation bases may not be accurate. 3 Activity-Based Costing (ABC) • Activity-based costing (ABC) allocates overhead costs to a product using activities required to produce the product. • Nonmanufacturing as well as manufacturing costs may be assigned. • Some manufacturing costs may be excluded from product costs. • Numerous overhead cost pools are used. 4 Which Method to Use • Managers have to do a cost-benefit analysis of which method to use. • Traditional method – Simple – Less costly • ABC ( benefit) – More accurate and significantly more expensive – Information helps organizations be competitive. – Managers use ABC in special circumstances. 5 Strategic Use of Activity-Based Management • ABC provides information about profitability in mix of activities, products. • ABM encourages managers to use information to become low-cost producer or seller. 6 Steps in Activity-Based Costing • Activity-Based Costing assigns costs first to activities then to products based on each product’s use of the activity. (Traditional) 1. Identify activities that consume resources; assign...
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This note was uploaded on 01/14/2012 for the course ECON 121 taught by Professor Mcdevitt during the Winter '10 term at UCLA.

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Chapter 3 - Activity-Based Management Maher 10e Chapter 3 1...

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