ABC, ABB, ABM

Question 1

Dibble -ABB,ABC,ABM

Answer 1

Summary: Implementation of Activity-Based Costing (ABC)

Implementation of ABC:

(i) Steps to Implement ABC:
1. Grouping Overheads into Cost Pools: Overheads are grouped into cost pools based on similar activities, as shown in Dibble’s management accounts.
2. Identifying Cost Drivers: Cost drivers are activities causing costs, such as the setup of CAM machinery in Steel Division driven by the number of production batches.
3. Calculating Cost per Unit of Cost Driver: Determine the cost per unit for each activity. Units requiring more of an activity (e.g., inspection) will absorb more overheads.
4. Adding Overheads to Prime Costs: Overhead costs are added to prime costs to calculate the full production cost.

(ii) Appropriateness of ABC:
- Complex Product Range: ABC is suitable for Steel Division due to its diverse and complex product range.
- Significant Overheads: With production overheads at 28% of total costs, ABC provides accurate product cost calculations.
- Pricing and Margin: Helps set competitive prices ensuring acceptable margins, aligning with Steel Division’s strategy to produce bespoke products competitively.
- Cost Management: Identifies cost drivers to control and reduce costs, relevant for activities not linked to production volumes like inspection costs.

Problems with ABC:
- Simplicity of Products: In businesses like Timber Division, with simple products and minimal overheads (1%), ABC may not be useful.
- Difficulty in Identifying Cost Drivers: Determining exact cost drivers can be challenging.
- Complexity and Time: ABC can be time-consuming, complex, and may not be understood by all managers, potentially not justifying the effort and expense, particularly in divisions with fewer overheads.

Activity-Based Management (ABM)

ABM Application:
- Product Pricing: Using ABC, Dibble can set prices ensuring margins while remaining competitive. For instance, adjusting the price of coated products in Steel Division to cover the $695k storage and transport costs currently underpriced.
- Customer Profitability: Identifying profitable customer groups allows focused resource allocation and market targeting. ABM can also help discontinue unprofitable product lines or customers.
- Cost Analysis: Analyzing activities helps reduce non-value-adding activities, such as unnecessary transport and storage, while focusing on value-adding ones like coating and painting.
- Design Improvements: ABM assists in strategic decisions at the design stage, using standard components to control costs and assessing the profitability of new products early.

Performance Measurement:
- Management Commitment: Successful ABM implementation requires senior management commitment and employee training.
- Performance Systems: New performance measures and reward systems aligning with ABM objectives are necessary.
- Information Systems: Upgrading or adapting information systems to collect and analyze data is crucial, though it incurs additional costs and may disrupt current activities.

Challenges in Implementation:
- Complexity and Resistance: Implementing ABC/ABM is complex and may face resistance from employees. Understanding benefits and methods is crucial.
- Cost vs. Benefit: Weighing the benefits against the costs of implementing ABC/ABM is essential, particularly in divisions with fewer overheads.

In conclusion, ABC/ABM can significantly improve cost management and strategic decision-making for Dibble, particularly in divisions with complex products and significant overheads. However, it requires careful consideration of implementation costs, potential resistance, and the specific context of each division.

Question 2

V- abc,abb

Answer 2

Summary: Activity-Based Management (ABM)

Overview of ABM:
- Principle: Applies Activity-Based Costing (ABC) to meet customer needs efficiently.
- ABC: Groups overheads into cost pools based on activities and identifies cost drivers, providing accurate product cost calculations.
- Cost Control: By managing activities that drive costs, ABM helps reduce non-value-added activities, cutting costs without compromising quality.

Choosing Products to Manufacture:
- Profitability Analysis: Helps identify which products to discontinue or develop based on their profitability, particularly important for Vunderg due to high overhead costs in procurement, customer administration, and product design.
- Custom Products: Loss-making products are often highly customized with low volumes, such as conservatories. ABM can identify and reduce the high overhead costs by standardizing materials and finishes.
- Factory Overheads: Conservatories use a disproportionate amount of factory space but contribute only 8% to total contribution, indicating high overhead usage.

Review of Costs, Prices, and Designs:
- Cost Drivers: Understanding product cost drivers enables actions to make unprofitable products profitable, such as resolving initial quality problems with glasshouses.
- Re-pricing: Special materials and finishes might warrant higher prices to cover procurement overheads.
- Design Improvements: ABM can suggest design changes to prevent issues, like leaking conservatories, thereby adding value for customers and reducing rectification costs.

Customer Profitability Analysis (CPA):
- Overhead Apportionment: Uses ABM to understand the profitability of different customer categories, crucial for Vunderg’s sales through 40 retailers.
- Order Size: Costs driven by the number of orders can be managed by insisting on minimum order sizes.
- Customer Support: Actions like offering product training and advertising support can improve the profitability of less profitable customers.

Limitations of ABM:
1. Identifying Activities and Drivers:
- Difficult to separately identify all key activities and their drivers.
- Hard to assign responsibilities across departmental boundaries.

2. Limited Usefulness:
   
   • More useful for highly customized products with high overheads.
   • Less effective for standardized products with few overhead costs, such as residential windows, where costs are already controlled.
3. Potential for Incorrect Decisions:
   
   • Despite difficulties, ABC should give a clearer picture of product profitability.
   • Decisions to discontinue products should consider overall business impact, such as how stopping conservatories could affect glasshouse sales.
4. Implementation Challenges:
   
   • Significant resource and cost requirements to set up ABM.
   • Potential staff resistance and need for expensive training.
   • Basic information systems might need upgrading to handle data collection for ABM.

In conclusion, while ABM can provide significant insights and benefits for Vunderg in managing costs and improving product profitability, its implementation comes with challenges and may not be equally beneficial across all product lines.