Week 2 - Cost Analysis (ABC vs TAC + more)

Question 1

Summary of ABC vs TAC

3

Answer 1

• Cooper, R., & Kaplan, R. S. (1988)
• Full-cost “constructs” the problem as one of product profitability thus misapplies pressure to manage cost across the organization
• For product selection decisions per unit costs are useful, but for cost management purposes they hide what are the important issues to address
• Encourages overproduction: Since fixed overhead costs are spread across more units when production increases, TAC can incentivise overproduction, leading to excess inventory.

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Question 2

Costing system trade-off:
How complex should it be?

2

Answer 2

• The number of cost pools and cost drivers is a trade-off between Cost pool homogeneity
  and Cost of analysis required to achieve it
• Reporting of inventory suggests ease of calculation (e.g. direct labour hours as a cost driver)

Question 3

Activity Based Costing Process

Answer 3

1) Break cost into activities
2) Find cause & effect cost drivers which render costs direct so they can be traced

Question 4

Lecture Key Points

Answer 4

• ABC allows for a more plausible picture of resource consumption than volume-based costing (TAC) which
  “shares” not “traces” cost
• ABC helps make better product selection decisions than TAC
• The real strength of ABC lies in its ability to inform a far wider range of cost management conversations and
  decisions however
• Analyse resource spending and Resource consumption independently with
  attention to unused capacity
• The hierarchy of costs insists that not everything can be usefully related to
  the unit of production, e.g.

Question 5

Issues with ABC (Kooper & Kaplan 1988)

2

Answer 5

Data collection can be time consuming and expensive, especialy for SMEs

Benefits are most significant in more complex environments with diverse products e.g. When theres a mix of low volume high costs products and high volume low cost.
,’, Less useful in simple settings

Question 6

Further issues with ABC (Kaplan & Anderson, 2004)

4

Answer 6

Data collection can be time consuming and expensive, especially for SMEs

Maintaining becomes burdensome as processes and resource costs are ever-changing

Over granular, creates thousands of cost pools, many of which add little value

Managerial resistance due to complexity