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

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Activity-Based Management Maher 10e Chapter 3 1
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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
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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
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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
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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
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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
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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.
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