Activities associated with the product will

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activities associated with the product will presumably disappear, but will the costs? If it is unclear who would be responsible for reducing the costs, no one may actually take any action. This is particularly true for personnel costs. What manager will voluntarily give up personnel if there is no accountability? Be sure to reinforce the idea that the costs assigned to a product, customer, or whatever in an activity-based costing system are relevant in a decision only if the costs would actually change if the decision were taken. For example, in a product drop decision, the costs of resources are relevant only if spending would decrease as a result of the decision or the resources would be redeployed to more profitable uses. In the latter case, this means that the resources would have to be redeployed to the constraint. An action analysis report makes it much clearer what costs are likely to be relevant in a decision and who in the organization would be responsible for the cost if an action is taken. Unfortunately, preparing an action analysis report requires considerably more work than the more conventional analysis. 1. Activity rates. (Exhibit 8A-2) The action analysis approach differs from the conventional ABC approach beginning with the computation of the activity rates. In the conventional analysis, a single activity rate is computed for each activity cost pool. In an action analysis, a rate is computed for each cost category within an 9
MANAGERIAL ACCOUNTING - IIE 211 CLASS 12 activity cost pool. Looking at Exhibit 8A-2, only the rates at the bottom of the Exhibit would be computed in a conventional analysis. In an action analysis, the entire table is filled out. 2. Second-stage allocations. (Exhibit 8A-3) In an action analysis, an entire matrix of costs is computed rather than just a total cost for each activity cost pool. Looking at Exhibit 8A-3, only the costs at the bottom of the Exhibit would be computed in a conventional analysis. In an action analysis, the entire table is filled out by multiplying activities by the activity rates in each cell. 3. The conventional activity analysis. From the action analysis cost matrix in Exhibit 8A-3, it is easy to construct the conventional activity analysis report showing product margins. Just take the totals from the bottom of the cost matrix. Note that these costs are identical to the costs computed earlier in the chapter in Exhibit 8-8. However, using the row totals from Exhibit 8A-3, it is possible to look at the margins of products and other cost objects from a different perspective. Instead of abstract labels like “order processing costs” for the various activity cost pools, the costs are labeled using the account titles from the company’s bookkeeping system. This makes it clear what the costs actually consist of and who in the organization would be responsible for taking action if a decision is made.

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