1. Activity-based Management

Question 1

What is the goal of ABC costing?

Answer 1

To spread overhead costs amongst the products that are made so that reasonable selling prices, inventory valuations and valid decisions can be made

Question 2

Why is traditional absorption costings not as valid in the modern production environment?

Answer 2

Overheads make up a larger proportion of production costs, costs used to be assumed to be absorbed at product level and now tend to be at batch/product sustaining level

Question 3

What are the steps for calculating cost per unit with ABC costing?

Answer 3

1. Split costs into cost pools
2. Establish a cost driver basis for each pool
3. Calculate the OAR for each driver
4. Use the OAR to absorb costs from each pool into cost units

Question 4

What is the hierarchy of activities?

Answer 4

A classification of activities by level of organisation

Question 5

What are the 4 standard categories in the ABC hierarchy of activities?

Answer 5

1. Product (unit) level
2. Batch level
3. Product sustaining
4. Facility sustaining

Question 6

What is the alternative hierarchy of activities?

Answer 6

1. Logistical
2. Balancing
3. Quality
4. Change

Question 7

What are the 4 key advantages of ABC?

Answer 7

1. Enables accurate costing of all activities
2. Easy to identify waste and non valuing adding activities
3. Encourages CI and total quality control
4. Help with future planning (pricing and projected expenditure)

Question 8

What are the 4 key disadvantages of ABC?

Answer 8

1. Difficult to set up
2. Can be time consuming
3. May provide too much detail, obscuring the bigger picture

Question 9

What is activity based management?

Answer 9

The wider used of ABC ideas to assist in decision making within an organisation

Question 10

What is strategic vs operational ABM?

Answer 10

Selecting the right products/markets/prices vs controlling costs and increasing efficiency

Question 11

What are the 5 outputs from an ABM system?

Answer 11

1. True costs of activities and business processes
2. Cost of non-value added activities
3. Activity based performance measures
4. Accurate product/service costs
5. Cost drivers

Question 12

What is business process re-engineering?

Answer 12

The radical reinvention of a whole process

Question 13

What is customer profitability analysis?

Answer 13

The analysis of revenue streams and service costs associated with specific customers or customer groups

Question 14

What are the 4 most common components of CPA?

Answer 14

1. Ordering
2. Delivery
3. After sales support
4. Customer/client meetings

Question 15

What four things can be measured to assess the performance of a distribution channel?

Answer 15

1. Effectiveness
2. Efficiency
3. Productivity
4. Profitability

Question 16

How would you measure distribution channel profitability using ABM?

Answer 16

Allocate costs on an activity basis to products and then reallocate the distribution channels based on the mix of products sold in each

Question 17

What is direct product profitability?

Answer 17

The attribution of both the purchase price and other indirect costs to each profit line, allowing a net profit to be identified for each product incorporating their resource consumption

Question 18

What are the 3 most common components of DPP?

Answer 18

1. Warehousing space
2. Transport costs
3. Store costs

Question 19

Are general admin and finance costs included in DPP?

Answer 19

No

Question 20

What are the 4 main benefits of DPP?

Answer 20

1. Better cost analysis
2. Better pricing decisions
3. Better management of store and warehouse space
4. More efficient decisions on product ranges