Chapter 2 Flashcards
What are the key trends in production?
- More machines and computerised manufacturing
- Smaller batch sizes
- Reduced direct labour cost (less use of direct labour) and more indirect overheads
CIMA definition of ABC
An approach to the costing and monitoring of activities which involves tracing resource consumption and losing final outputs.
Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs
Cost Pool
An activity that consumes resources for which overhead costs are identified and allocated - each has a cost driver
Cost Driver
A unit of activity level that consumes resources aka a factor influencing the level of cost/
ABC reduces the incidence of arbitrary apportionments.
Selecting cost pools
Only select a few even if there are many to avoid it getting too complex
What are the types of activities/cost pools?
- logistical transactions
- balancing transactions
- quality transactions
- change transactions
Logistical Transactions
Concerned with moving materials or people, and tracking the progress of materials or work through the system
Balancing Transactions
Concerned with ensuring resources required for an operation are available e.g. raw material
Quality Transactions
Concerned with ensuring that output or service levels meet quality requirements and customer expectations e.g. inspections
Change Transactions
Activities required to respond to change in customer demand, design specifications, scheduling changes, a change in delivery methods etc
Selecting cost drivers
Only select one per cost pool - they must be relevant and easy to measure.
Usually the number of transactions relating to the activity
What are types of cost drivers?
- Transaction drivers
- Duration drivers
- Intensity drivers
Transaction Drivers
The cost of an activity is affected by the number of times a particular action is undertaken e.g. batches of material
Duration Drivers
The cost of an activity is affected by the length of time it takes to perform the activity e.g. set up time
Intensity Drivers
Efforts are directed to determining what resources were used in the making of the product e.g. applying an additional weighting to o/s deliveries over home.
When it ABC relevant and useful?
- Indirect costs > direct costs
- Complex products/services
- Products/services are tailored to customer specifications
- Some products/services are sold in large numbers and others in small
What is the hierarchy of costs? (cooper)
- Unit level activities
- Batch level activities
- Product level activities
- Facility level activities
Unit Level
The consumption of resources is very strongly correlated with the number of units produced (all direct costs)
Batch Level
Resources are consumed in proportion to the number to batches produced - easier to visualise the changing cost that will come about in the long term by changing a product mix or production schedule. e.g. material inspection
Production Level
Consumption of resources may be related to the existence of particular products i.e. if the activity is performed to sustain the existence of a product line (such as admin, product specification or purchasing)
Facility Level
Accepted that some costs that related simply to being in business and can not in any way be related to the production line
e.g. ground maintenance, security, property taxes
Deficiencies of ABC in decisions making
- Historical
- Based on current methods of organisation and operation
- At product level contain allocation of joint/common costs
Importance of ABC in decision making
Good for drawing attention to the likely impact on long-run variable costs of short-term decisions
Advantages of ABC
CARDIAS
Control over overheads by managing cost drivers
Accuracy of cost per uni it better - improves pricing/strategy/decisions
Recognises that o/h’s are not all related to production and sales volume
Derive realistic costs in a complex business environment
Insight into what drives o\h’s
Services can you ABC
Disadvantages of ABC
BASIL
Benefit may not justify the costs
Arbitrary choice of cost drivers and activities
Stakeholders may find complex to understand
Impossible to allocate all o/h costs to specific activities
Limited benefit if o/h’s are primarily volume related or in a small proportion.
Implications of moving to ABC
- Pricing based on more realistic cost data
- Sales strategy more accurate - target those who are more profitable using ABC
- Improve decision making - products with highest sales margins
- Improve performance management: ABC used for budgeting and long term forward planning.
