P2 Flashcards
ABC & ABM
What is ABC and how does it differ from traditional systems of costing?
Traditional Absorption Costing = costs are gathered together based on where they are incurred, i.e. cost centers, and the cost objects are based on absorption rates.
ABC = costs are gathered together into costs pools/activities, and the costs objects are based on activity cost drivers.
ABC & ABM
What are the 5 steps in ABC?
ABC & ABM
What is the ABC Cost Hierarchy and what is in the hierarchy?
Costs are driven by, and are variable with respect to, activates that occur at four levels:
- Unit-Related = Activities are performed each time a unit of product is produced.
- Batch-Related = Activities are performed each time a batch is produced.
- Product-Sustaining = Activities are performed to support different products in the product line. Independent of how many units/batches are being produced.
- Facility-Sustaining = Some costs cannot be related to a particular product line, instead they are related to maintaining buildings and the facilities.
ABC & ABM
What are the 6 advantages of ABC and the 1 advantage of ABM?
ABC
- Better decision making
- More detailed insight
- Fixed costs are easier to control over the long term
- Improve basis to assess performance
- Better forecasting
- More motivational to staff
ABM
1. Greatest in organisations that have high indirect costs.
ABC & ABM
What are the 4 limitations of ABC and the 3 limitations of AMB?
ABC
- Little evidence that ABS improves corporate profitability
- Historic and internally focused
- Hard to implement
- An extension of absorption costing
ABM
- Too inwardly focussed
- Not all OH costs are variable
- Complicated and expensive to implement
ABC & ABM
What is ABM and what are the 5 basic information outputs?
ABM
- Activity Based Management focuses management attention on key value-adding activates, key customers and key products in order to maintain or increase competitive advantage.
- Cost of activities and business processes
- Cost of non-value added activities
- Activity based performance measures
- Accurate product/service costs
- Cost drivers
ABC & ABM
What is CPA?
CPA
- Customer Profitability Analysis uses ABC principles to identify the most profitable customers or groups of customer so that efforts can be directed towards attracting and retaining those customer. Information can be used to review the business model currently offered to less profitable customers.
- Different customers and customer groups will make use of different activities and to varying degrees. ABC created customer profiles and the analysis of customer profitability.
ABC & ABM
What is DPP and what is ignored when calculating?
Direct Product Profitability deducts bought-in costs from selling price to arrive at gross profit margins, but indirect costs are also deducted from gross margin to arrive at a direct product profit.
Those indirect costs are based on the way the goods have been used or created.
Non-product specific costs should be ignored in calculating a product’s direct profitability.
ABC & ABM
What are the 5 advantages of DPP?
- Better cost analysis
- Better pricing decisions
- Better management of store and warehouse space
- The rationalisation of product ranges
- Better merchandising decisions
ABC & ABM
What is the Pareto rule?
The Pareto rule is based on the observed phenomenon that 80% of a populations wealth is owned by 20% of the people.
Pareto analysis simply aims to identify the most significant areas within one aspect of the business, thus allowing management to focus on and control these most important areas.
