4 Activity Based Costing & Management

Question 1

What is activity-based costing?

Answer 1

An attribution of costs to units/products on the basis of benefit received from indirect activities

Question 2

What is an activity?

Answer 2

An activity is an event that incurs costs

Question 3

What is a cost object?

Answer 3

A cost object is defined as anything for which a separate measure of cost is desired/required

Question 4

What is an activity cost pool

Answer 4

The overhead costs allocated to a distinct type of activity or related activities

Question 5

What is a cost driver?

Answer 5

A cost driver is any factor or activity that has a direct cause and effect relationship with the resources consumed

Question 6

What is a cost unit?

Answer 6

An item of production or a service for which it is useful to have cost information

Question 7

What is cost accounting?

Answer 7

The process of identifying, analyzing, summarizing, recording and reporting costs associated with business operations

Question 8

What are direct costs?

Answer 8

Those costs that are directly associated with the manufacturing process

Question 9

What are indirect costs?

Answer 9

Those costs that are not directly identifiable with a unit of production

Question 10

What is a resource?

Answer 10

An economic element needed or consumed in performing activities, such as salaries and supplies

Question 11

What are the three steps to develop ABC

Answer 11

1. Identify resource costs and activities
2. Assign resource costs to activities
3. Assign activity costs to cost objects

Question 12

How do you identify resource costs and activities?

Answer 12

An activity analysis is performed to identify key activities and the way in which the activities consume resources

Question 13

How do you assign resource costs to objectives?

Answer 13

Use resource consumption cost drivers based on cause-and-effect relationships, such as the number of labor hours, setups, moves, machine-hours, employees, or square feet to assign resource costs

Question 14

How do you assign activity costs to cost objectives?

Answer 14

Use activity consumption cost drivers, such as purchase orders, receiving reports, parts stored, direct labor-hours, or manufacturing cycle time to assign activity costs

Question 15

What are unit level costs?

Answer 15

A unit-level activity is performed on each individual unit of product or service of the firm

Question 16

What are batch level costs?

Answer 16

A batch-level activity is performed for each batch or group of units of products or services

Question 17

What are product level costs?

Answer 17

A product-level activity supports the production of a specific product or service

Question 18

What are facility level costs?

Answer 18

A facility-level activity supports overall operations

Question 19

How does ABC help organisations?

Answer 19

• Improved profitability measures due to more accurate costs
• Improved decision-making: identification of value-added vs. non-value-added activities and associated costs
• Information for process improvement
• Improved cost planning
• Helps identify and control the cost of unused capacity
• ABC can be used to estimate customer-related costs and therefore assess the profitability of a specific customer or group of customers

Question 20

What are the five steps of strategic decision making?

Answer 20

1. Determine the Strategic Issues Surrounding the Problem
2. Identify the Alternative Actions:
3. Obtain Information and Conduct Analyses of the Alternatives
4. Based on Strategy and Analysis, Choose and Implement the Desired Alternative
5. Provide an On-going Evaluation of the Effectiveness of implementation in Step 4.

Question 21

What is activity based management?

Answer 21

ABM manages activities to improve the value of products or services to customers and increase the firm’s competitiveness and profitability

Question 22

What does ABM focus on?

Answer 22

• Focuses on the efficiency and effectiveness of key business processes and activities
• Improves management’s focus on the firm’s critical success factors thereby enhancing the firm’s competitive advantage

Question 23

What is operational ABM

Answer 23

Operational ABM enhances operational efficiency and asset utilization and lowers costs; it focuses on doing things right and performing activities more efficiently

Question 24

What is strategic ABM

Answer 24

Strategic ABM attempts to alter the demand for activities and increases profitability through improved activity efficiency

Question 25

What is activity analysis?

Answer 25

Assessment of each activity based on its need by the product or the customer, its efficiency, and its value content

Question 26

What is value added analysis?

Answer 26

An effort to identify and eliminate activities that add little or no value to the customer; resource consumption can be reduced and the firm can focus on activities that increase customer satisfaction

Question 27

What are high value add activities?

Answer 27

• Significantly increase the value of the product or service
• Are necessary to meet customer requirements
• Enhance purchased materials or components
• Contribute to customer satisfaction
• Are critical steps in a business process
  o In short, removal would reduce the value of the product or service

Question 28

What are low value add activities

Answer 28

• Consume time, resources, or space but add little or nothing to satisfying customer needs
• Can be eliminated without affecting the form/fit/function of the product or service

Question 29

What is customer profitability analysis?

Answer 29

Identifies customer service activities and cost drivers and determines profitability for each customer or group; this process allows the firm to chose its customer mix, determine an appropriate offering of after-sale services, decide what discounts to offer, etc.

Question 30

What is customer cost analysis?

Answer 30

The first step in a customer profitability analysis; it identifies activities and cost drivers to service customers before and after sales

Question 31

What are some customer unit level related costs?

Answer 31

Resources consumed for each unit sold to a customer, such as sales commissions and shipping costs based on units sold or shipped

Question 32

What are some customer batch level related costs?

Answer 32

Resources consumed for each sales transaction, such as order-processing costs or invoicing costs

Question 33

What are some customer-sustaining related costs?

Answer 33

Resources consumed to service a customer regardless of the number of units or batches sold, such as monthly statement processing costs and collection costs for late payments

Question 34

What are some customer distrobution channel related costs?

Answer 34

Resources consumed in each distribution channel the firm uses to service customers, such as the cost of operating a regional warehouse or centralized distribution centre

Question 35

What are some customer sales sustaining related costs?

Answer 35

Resources consumed to sustain sales and service activities that cannot be traced to an individual unit, batch, customer, or distribution channel, such as general corporate marketing expenditures for sales activities and the salary, fringe benefits, and bonus of the general sales manager

Question 36

What is customer lifetime value?

Answer 36

Some companies quantify customer value in what is called Customer Lifetime Value (CLV), which is equal to the net present value (NPV) of all estimated future profits from the customer for a specified period of time

Question 37

What questions help understand the value of a customer?

Answer 37

1. What is the growth potential of the customer and the customer’s industry?
2. What is its “cross-selling” potential?
3. What are the possible reactions of the customer to changes in sales terms or services?
4. How important is this customer as a future sales reference?

Question 38

What are the three foundational concepts for Resource Consumption Accounting?

Answer 38

• The view of resources – resources are the suppliers of capacity, meaning that capacity is a function of the resources available.
• The quantity-based model – an operational view of the organization based on the concept that there is a causal relationship that can be expressed in terms of input and output units.
• Cost behavior – the characteristics of the cost are inherent to the underlying resource and the consumption of those resources by value creating operations.

Question 39

What is Time Driven ABC

Answer 39

• Is based on the idea that the common element in the utilization of many activities is the unit of time
• Assigns resource costs directly to cost objects using the cost per time unit of supplying the resource
• Requires the total activity cost be divided by the number of minutes available to that activity to provide a cost per unit of time