Activity-Based Management
ABM describes management decisions that use
activity-based costing information to satisfy
customers and improve profits.
Product pricing and mix decisions
Cost reduction and process improvement decisions
Design decisions
Product Pricing and
Mix Decisions
ABC gives management insight into the cost
structures for making and selling diverse products.
It provides more accurate product cost
information and more detailed information
on costs of activities and the drivers of those costs.
Cost Reduction and Process
Improvement Decisions
Manufacturing and distribution personnel use
ABC systems to focus on cost-reduction efforts.
Managers set cost-reduction targets in terms of
reducing the cost per unit of the cost-allocation base.
Design Decisions
Management can identify and evaluate new designs
to improve performance by evaluating how product
and process designs affect activities and costs.
Companies can work with their customers to
evaluate the costs and prices of alternative designs.
Learning Objective 7
Compare activity-based costing
systems and department-
costing systems.
ABC and Department
Indirect-Cost Rates
Many companies have evolved their
costing system from using a single
cost pool to using separate indirect-cost
rates for each department:
Design
Manufacturing
Distribution
ABC and Department
Indirect-Cost Rates
Why?
Because the cost drivers of resources in each
department or subdepartment differ from the
single, company-wide, cost-allocation base.
ABC systems are a further refinement of
department costing systems.
Learning Objective 8
Evaluate the costs and benefits
of implementing activity-based
costing systems.
Benefits of ABC Systems
Significant amounts of indirect costs are
allocated using only one or two cost pools.
All or most costs are identified
as output unit-level costs.
Products make diverse demands on
resources because of differences in
volume, process steps, batch size,
or complexity.
Benefits of ABC Systems
Products that a company is well-suited to
make and sell show small profits while
products for which a company is less
suited show large profits.
Complex products appear to be very
profitable and simple products
appear to be losing money.
Benefits of ABC Systems
Operations staff have significant
disagreements with the accounting
staff about the costs of manufacturing
and marketing products and services.
Limitations of ABC Systems
The main limitations of ABC are the
measurements necessary to
implement the system.
ABC systems require management
to estimate costs of activity pools
and to identify and measure cost
drivers for these pools.
Limitations of ABC Systems
Activity-cost rates also need to be
updated regularly.
Very detailed ABC systems are costly
to operate and difficult to understand.
ABC In Service and
Merchandising Companies
The general approach to ABC in the
service and merchandising areas is very
similar to the approach in manufacturing.
Costs are divided into homogeneous cost
pools and classified as output unit-level,
batch-level, product- or service-sustaining,
and facility-sustaining costs.
ABC In Service and
Merchandising Companies
The cost pools correspond to key activities.
Costs are allocated to products or customers
using activity drivers or cost-allocation
bases that have a cause-and-effect
relationship with the cost in the cost pool.