horngren_ima15_im 04.doc

A an illustration of traditional see exhibit 4 6 and

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A. An Illustration of Traditional (see EXHIBIT 4-6 ) and ABC Systems Activity-Based Accounting (ABA) or Activity-Based Costing (ABC) systems first accumulate overhead costs for each of the activities of an organization, and then assign the costs of activities to the products, services, or other cost objects that caused that activity. Cost Drivers are identified for each activity to establish a cause-effect relationship between an activity and a cost object. Traditional systems often use only one cost driver and do not attempt to identify, accumulate, or report costs by activities performed. There are many variations in the design of ABC systems. In a two-stage ABC system (see EXHIBIT 4-7 ), there are two stages of allocation to get from the original resource cost to the final product or service cost. The first stage allocates costs to activity-cost pools. A cost pool is a group of individual costs that is allocated to cost objectives using a single cost driver. The second stage allocates activity costs to the products or services. The first- stage cost drivers are usually percentages. V. Activity-Based Management: A Cost Management System Tool {L. O. 8} Activity-based management (ABM) is using the output of an activity-based cost accounting system to aid strategic decision making and to improve operational control of an organization. One of the most useful applications of ABM is distinguishing between value-added cost (the necessary cost of an activity that a company cannot eliminate without affecting a product’s value to the customer), and nonvalue-added cost (unnecessary costs that a company tries to minimize and eliminate without affecting a product’s value to the customer). Examples of non- value-added costs are handling and storing inventories, and changing the setup of 49
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production-line operations to produce a different model of the product. Another ABC-related technique that has gained popularity is benchmarking (the continuous process of comparing products, services, and activities to the best industry standards. A. Benefits of Activity-Based Costing and Activity-Based Management Many organizations in the manufacturing industry and service sector are adopting ABC systems because: 1. Fierce competitive pressure has resulted in shrinking profit margins. Companies often do not have confidence in the accuracy of the margins for individual products or services. 2. Greater diversity in the types of products and services, as well as customer classes, results in greater business operating complexity. The consumption of a company’s shared resources also varies substantially across products and customers. 3. New production techniques have increased the proportion of indirect costs. 4. The rapid pace of technological change has shortened product life cycles. Companies do not have time to make price or cost adjustments once they discover costing errors.
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