Lecture 5

Question 1

Activity-Based Management

Answer 1

The use of ABC information to reduce the cost of activities and the frequency of non-value-added activities.

Question 2

Non-Value-Added Activities:

Answer 2

An activity that generates cost but no value to the customer, and therefore reduces the supply chain surplus. We should eliminate/reduce these if possible!

(Supply-Chain Surplus, Insufficient-value-added activities)

Question 3

Supply-Chain Surplus:

Answer 3

The value of the product provided to the customer minus the sum of all supplier costs. The total societal benefit of the sale.

Question 4

Insufficient-value-added activities:

Answer 4

Activities that add some value, but not enough to justify their existence.

Question 5

Activity-Based Pricing:

Answer 5

The use of ABC information to generate prices that more accurately reflect the cost of activities that customers desire

Question 6

WHY ABC Changes the Game

Answer 6

Distributive Bargaining: Arguing about who gets the larger piece of pie.

ABC lets us change the game! Now we try to come up with solutions that benefit both parties.

Integrative Bargaining: Working together to make the pie bigger so everyone gets a bigger piece.

Essentially ABC helps taking us from Distributive Bargaining to Integrative Bargaining

Question 7

Pros and Cons of Using ABC costing:

Answer 7

Cons :
ABC is more complicated
ABC is only good as the drivers chosen

Pros:
ABC is more accurate usually

Question 8

Advantages and disadvantages of using allocation rates

Answer 8

Overhead as a Tax :

Businesses can use OH rates like governments use taxes: to suppress undesirable behaviour with high rates, or encourage desirable behaviour through low rates.

The allocation rate is sometimes called the “Burden Rate” or “Tax Rate”

When you “tax” specific activities, managers will cut back on those activities and replace them with other activities.

ex:
* Reduced use of machines (doing things by hand instead)
——————————————————-

But sometimes those original costs were fixed! E.g., maybe we bought some nice machines to automate tasks, but managers don’t want to be charged to use them, so they do the tasks by hand instead!

ex:
* Machines continue to depreciate (and incur expenses), but we also incur more labour costs!

also

Sometimes hard to decide which costing system is the best

A poor costing system can lead to poor decisions!

Using allocation rates make costing even More Complex Costing!:

Question 9

Three Allocation Methods

Answer 9

*Direct

*Step-down

*Reciprocal

Question 10

Over- or underallocation in actual costing

Answer 10

Over- or underallocation of indirect costs can never occur under actual costing.