ABC and ABM Flashcards
What are cost drivers?
be readily measurable
link activity, overhead and output
be reasonable approximations of cause of activity’s cost
be subject to cost/benefit criterion
What is an OH cost pool?
An overhead cost pool is created for each activity
Equivalent of traditional method’s cost centre
Overheads are allocated and apportioned to cost pools
Secondary distribution not necessary
What is absorption rate?
A cost driver absorption rate is developed for each activity
Like traditional rates predetermined may be preferable
ABC likely to have more absorption rates than traditional method
Calculation for absorption rate?
Total cost from cost pool / unit of cost driver
What are the benefits of ABC?
More accurate product-line costings
Flexible enough to analyse cost objects rather than products
Reliable indication of long run variable product cost
Provides meaningful measures which are relevant for performance assessment
Helps in understanding of cost behaviours
Provides a logical and comprehensive basis for costing
What are the limitations of ABC?
ABC involves collecting data not previously collected
Selected activity cost pools may not correspond to the formal structure of cost responsibilities
Some costs apply to more than one activity cost pool
ABC systems are more costly and complex than traditional absorption costing systems
What is activity based management?
it is ABC ‘in action’
seeks to classify activities as value-added or non-value-added
focuses on decision making and planning and continuous improvement
can be used to assess strategic decisions
What are the outputs of ABM?
The costs of activities and business processes
The cost of non-value-added activities
Activity based performance measures
Accurate product/service cost
Cost drivers
What is direct product profitability?
Started in USA in 1960s
Used by retail organisations
Attributes indirect costs to product lines
Cost attribution process uses a variety of measures to reflect resource consumption
Calculates a net profit per product line
Developed in parallel with ABC over years
DPP Proforma?
Selling price 1.50
Less: bought-in price (0.80)
––––
Gross margin 0.70
Less:
Indirect product costs:
Warehouse costs 0.16
Transport costs 0.18
Store costs 0.22
(0.56)
Direct product profit
0.14
What are the benefits of DPP?
Better cost analysis
Better pricing decisions
Better management of store and warehouse space
The rationalisation of product ranges
Better merchandising decisions
What is customer profitability analysis?
The analysis of revenue stream and service cost associated with specific customers or customer groups”
Performance Management, 2011, p. 393
“Customer profitability analysis provides important information that can be used to determine which classes of customers should be emphasised or de-emphasised and the price to charge for customer services”
Drury, 2012, p.239
Uses an activity based approach in order to assess customer profitability
It allows an organisation to determine which customer to focus on and at what price
Benefits of customer profitability analysis?
Allows a company to focus resources
Identifies unexpected differences in profits among customer groups
Helps to understand any proposed changes in revenues, costs etc
Can be used to analyse customer segment profitability when there is a large customer base e.g. Egg
What is distribution channel profitability?
Uses an activity based approach to relate revenues and costs to distribution channels
Relative profitability of different distribution channels can then be assessed
Key aspects that need to be considered:
Access to customer base
Brand awareness
Achieving sales and market targets
Customer retention
