Ch.5 - Ch 5 Activity-Based Costing and Management ACC2002...

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Ch. 5 Activity-Based Costing and Management ACC2002 Managerial Accounting Qi (Susie) Wang Wang 2013 1
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ABC System An approach for the allocation of overhead costs to multiple activity cost pools Assign the activity cost pools to products by means of cost drivers Definition Activity: Any event, action, transaction, or work sequence that incurs cost Activity Cost Pool: the overhead cost attributed to a distinct type of activity Cost Driver: any factor or activity that has a direct cause-effect relationship with the resources consumed Products consume activities, and activities consume resources 2 Wang 2013
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ABC System in Business—Payoff from ABC Insteel Industries Headquartered in North Carolina, Insteel has operated as a manufacturer of precast concrete products for the construction industry since the 1950s. Manufacture concrete reinforcing steel, industry wire, and bulk nails for the construction, home furnishings, appliance, and tire manufacturing Implement ABC at its manufacturing plant in South Carolina Use activity-based data to make operating decisions ABC system revealed that its 20 most expensive activities consumed 87% of the costs Almost $4.9 million was being consumed by non-value-added activities Wang 2013 3
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ABC System in Business—Payoff from ABC Insteel Industries Use activity-based data to make operating decisions Teams were forms to reduce costs such as material handling, freight costs, and maintenance costs. Within one year, costs were cut by $2.3 million, and non- value-added costs dropped by about 6% Use activity-based data to make strategic decisions Drop unprofitable products, raise prices on some products Discontinue relationships with unprofitable customers Redeploy its freed-up capacity to increase sales Use ABC system to identify which new business opportunities to pursue Wang 2013 4
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ABC System in Business— Implementation of ABC Xu Ji Electric Company A listed company on Shenzhen Stock Exchange in China Manufacture electrical products, including electronic telecommunication systems, transformers and automation systems for railway and power stations Used to use a traditional costing system which was based on direct labor hour to allocate manufacturing overhead Inaccurate product costing and divisional profitability information Impede the company’s ability to compete on pricing E.g. One of its products cost RMB800, while its main competitor priced the product with the same specification at RMB500 From 2001 to 2003, it successfully implemented an ABC system Wang 2013 5
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ABC System in Business— Implementation of ABC Xu Ji Electric Company Objective of the ABC project To establish accurate product costing information for cost control purposes ABC Implementation Team All cost accountants An outside consulting team of scholars from the Shanghai University of Finance and Economics Build an ABC conceptual model
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