Managerial Accounting - ABM

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					Managerial Accounting:
An Introduction To Concepts, Methods, And Uses

          Chapter 3
Activity-Based Management

       Maher, Stickney and Weil
    Learning Objectives              (Slide 1 of 2)

   Identify strategic and operational uses of
    activity-based management.
   Differentiate between traditional cost
    allocation methods and activity-based
   Understand the concept of activity-based
   Identify the steps in activity-based costing.

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    Learning Objectives           (Slide 2 of 2)

   Apply activity-based management and costing
    to marketing.
   Use the cost hierarchy to organize cost
    information for decision making.
   Distinguish between resources used and
    resources supplied, and measure unused
    resource capacity.
   Explain the difficulties of implementing
    advanced cost-management systems.

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     Activity-based Costing and
    Management (ABCM) (Slide 1 of 5)
   ABCM rests on this premise:
        Products require activities
        Activities consume resources

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     Activity-based Costing and
    Management (ABCM) (Slide 2 of 5)
   To understand a product’s costs, one
        Identify activities required to make the
        Identify resources used to provide for
         those activities
        Figure the cost of those resources

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     Activity-based Costing and
    Management (ABCM) (Slide 3 of 5)
   To be competitive, managers must
    know both:
        Activities involved in making the goods or
         providing the services, and
        The cost of those activities

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     Activity-based Costing and
    Management (ABCM) (Slide 4 of 5)
   ABCM has 2 parts:
        The costing part known as Activity-based
         Costing (ABC)
        The management part known as Activity-
         Based management (ABM)

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     Activity-based Costing and
    Management (ABCM) (Slide 5 of 5)
   ABC treats mostly indirect costs
        Overhead costs related to the manufacture
         of a product or providing a service
        Indirect costs of marketing a product
        Indirect costs of managing a company

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         Strategic Use of ABCM
   Managers use activity-based
    information in 2 ways:
       To shift the mix of activities and products
        away from less profitable to more
        profitable operations
       To help them become a low-cost producer
        or seller

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               Activity Analysis
   Involves 4 steps:
       Chart activities used to complete the
        product or service
       Classify activities as value-added or non-
       Eliminate non-value-added activities
       Continuously improve & reevaluate
        efficiency of activities or replace them with
        more efficient activities
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                   Cost Pools
   Cost pools are groups of costs
   Three major types of cost pools:
       Plant (traditional)
       Department (traditional)
       Activity center (activity-based costing)

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Traditional Allocation Methods
   Plantwide allocation
       Uses the entire plant as a cost pool
       Simple organizations with only a few
        departments and little variety in activities
        might use this method
   Department allocation
       Uses separate cost pools with different
        overhead allocation rates for each
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         Activity-Based Costing
   Activity-based costing (ABC)
       Assigns costs first to activities
       Then to products based on each product’s
        use of activities

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             Costing Methods
   Requires the following steps:
     1. Identify activities that consume resources
       and assign costs to those activities
     2. Identify cost drivers associated with each
        A cost driver is a factor that causes or
         “drives” an activity’s costs
     3. Compute a cost rate for each cost driver
     4. Assign costs to products
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              Cost Rates per
              Cost Driver Unit
   Calculate predetermined cost rate for
    each cost driver as follows:

    Predetermined = Estimated indirect cost
     cost rate    Est.volume of allocation base

       Multiply predetermined cost driver rate
        times volume of cost drivers consumed
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               Cost Hierarchies
Activity Category    Examples
   Capacity            Plant Mgmt & Depr

   Customer            Mkt Research

   Product             Product Specs & Testing

   Batch               Machine Setups

   Unit                Direct Materials
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         Resources Used Vs.
         Resources Supplied
   ABC estimates cost of resources used
    by an activity as:
    Cost driver rate X cost driver volume

   Cost of Resources supplied = amount
    spent on the activity
   Difference between resources used and
    supplied is unused capacity
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If you have any comments or suggestions concerning this
PowerPoint Presentation for Managerial Accounting, An
Introduction To Concepts, Methods, And Uses, please contact:

                 Dr. Donald R. Trippeer, CPA
              Colorado State University-Pueblo

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