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© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg& Wolcott’s Cost Management, 2eSlide # 19•Activities can be defined so that the costs of stages of production or of a business process are accumulated.Q4:ABM & Product/Process Improvements•Examples include•determining the costs of non-value-addedactivities so the most costly can be reduced or eliminated•changing the steps in the accounts payable function to reduce the number of personnel•determining the most costly stages of product development so that the time to market is reduced© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg& Wolcott’s Cost Management, 2eSlide # 20•Activities can be defined so that types of environmental costs are accumulated.Q4:ABM & Environmental Costs•Examples include•capturing the costs of contingent liabilities for waste disposal site remediation•comparing the cost of recycling packaging to the cost of disposal•computing the costs of treating different kinds of emissions© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg& Wolcott’s Cost Management, 2eSlide # 21•Activities can be defined so that categories of costs of managing quality are accumulated.Q4:ABM & Quality Costs•Common categories of quality costs are•costs of prevention activities•costs of appraisal activities•costs of production activities•costs of postsales activitiesQ5: What are GPK and RCA?•Costing approaches similar to ABC because they involve multiple pools and multiple drivers•GPK can be described as marginal planning and cost accounting–Each cost is traced to a cost center (smaller than a department) which performs a single repetitive activity, and is the responsibility of one manager)–Output measures tracks the volume of resource use–Costs are segregated into proportional (change with volume in resource use) and fixed–Practicalcapacity is used for estimated allocation rate volumes© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg & Wolcott’s Cost Management, 2eSlide # 22Q5: Capacity Definitions•Theoreticalcapacity –maximum assuming continuous, uninterrupted operations 365 days/year•Practicalcapacity –typical operating conditions•Budgetedcapacity –expected volume for the upcoming time period•Idle/excesscapacity –difference between activity capacity used and one of the above measures of capacity© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg & Wolcott’s Cost Management, 2eSlide # 23•Resource Consumption Accounting (RCA)•Builds on GPK and ABC principles•Each cost is assigned to a resource cost pool–Labor and machinery are often placed in different cost pools since they are different types of resources–RCA involves a significantly larger number of cost pools than traditional accounting–Like GPK, segregates proportional and fixed costs–Utilizes theoreticalrather than practical capacity for allocating fixed costs•More likely to focus manager attention on reducing idle and non-productive resource time© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg & Wolcott’s Cost Management, 2eSlide # 24Q5: What are GPK and RCA?Q5: Benefits/Drawbacks to GPK/RCA•Benefits–Generates multi-level internal income statements useful for short terms decisions because it focuses on marginal cost–Increases cause & effect awareness among managers–Categorizes costs (and generates profit margin) at the product, product group, division, and company level–Avoids arbitrary allocations of fixed costs •Drawbacks–Can be costly to implement–Can result in a large number of variances to analyze© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg & Wolcott’s Cost Management, 2eSlide # 25Q5: Comparison of ABC, GPK, and RCAABCGPKRCACharacterof cost accounting system Full costing Marginal costing Full and marginal costing Location of dataDatabase separate from general ledgerComprehensiveaccounting system Comprehensive accounting system Primary decision relevance Mid-to long-term Short-term Short-, Mid-, and Long term Allocation of overhead based antivivisectionist Resourcefulness/or activities Cost Drivers Activity –Based Resource Output related Resource output or activity related Fixed cost allocation rate denominator Actual, budgeted, or practical capacity Budgeted or practical capacity Theoretical capacity© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg & Wolcott’s Cost Management, 2eSlide # 26© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg& Wolcott’s Cost Management, 2eSlide # 27•Benefits•more accurate and relevant product cost information•employees focus attention on activities•measurement of the costs of activities and business processes•identify non-value-added activities and reduce costsQ6:Decision Making with ABC, GPK, and RCA•Costs•systems can be difficult to design and maintain•more information must be captured •decision makers may not use the information appropriately© John Wiley & Sons, 2011Chapter 7: Activity-Based Costing and ManagementEldenburg& Wolcott’s Cost Management, 2eSlide # 28•Judgment is required when determining activities.Q6:Uncertainties in ABC and ABM Implementation•Judgment is required when selecting cost drivers.•Denominator levels for cost drivers are estimates.•ABC information includes unitized fixed costs, so decision makers mus

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