P2 - 1. Activity-Based Management Flashcards
What is the goal of ABC?
Spreading overhead costs more accurately for better selling prices, inventory values and management decisions can be made
What is the process of ABC?
- Split costs into cost pools (particular activities)
- Establish a cost driver (factor influencing the level of cost) for each pool
- Work out the OAR for each cost driver
- Use the OAR rate to calculate costs absorbed by each product
What is the formal definition of Activity Based Costing?
An approach to costing and monitoring of activities which involves tracing resource consumption and costing final outputs
What is the hierarchy of activities?
Classification of activities by level of organisation
What are the 4 levels in the classic ABC hierarchy of activities?
- Unit level (machine power, maintenance)
- Batch level (Set up, quality)
- Product sustaining (marketing, design)
- Facility sustaining (Rent & rates)
What are the 4 levels in the alternative ABC hierarchy of activities?
- Logistical (moving/recording)
- Balancing (resources)
- Quality (standards)
- Change (change in demand, design)
What are the 4 main advantages of ABC?
- Enables accurate costing of activities
- Easy to identify high and low cost areas
- Helps with product planning
- Fair assessment of product performance
What are the 3 main disadvantages of ABC?
- Difficult to set up and establish
- Time consuming
- Too much detail (obscuring bigger picture)
What is Activity Based Management?
The wider use of ABC ideas to assist in decision making
What are the 4 principle areas of ABM?
- Activity based budgeting
- Cost reduction
- Customer profitability analysis
- Distribution channel profitability analysis
What are the 5 outputs from ABM?
- Accurate costs of activities
- Cost of non value adding activities
- Activity based performance measures
- Accurate product costs
- Cost drivers
What is business process re-engineering?
The radical reinvention of a whole process
What is Customer Profitability Analysis?
The analysis of revenue streams and service costs associated with specific customers to see if they truly generate as much profit as is thought
What are the 7 figures that are included in CPA?
- Revenue (+ discounts)
- COS
- Ordering costs
- Delivery costs
- Client meetings
- After sales support
- Specific financing costs
What is Direct Product Profitability?
Attributing both the purchase price and other indirect costs to each product line to find a net product profit
