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Schulich ACTG 2020 Class 3.docx

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ACTG 2020
Jean Adams

Class 3 Activity Based Costing - Activity-Based Costing (ABC) has been developed to overcome traditional costing limitations. It increases the accuracy of product costing by using multiple cost pools to develop multiple application rates. - Establishes relationships between overhead costs and activities so that the overhead costs can be more precisely allocated to products, services, or customer segments. - Products are charged for costs of capacity they use- not for costs of capacity they don’t use. Unused capacity costs are treated as period expenses. - Consequence for activity-based is surcharge (i.e. Shipping) - There is no real solution for ABC, just opportunities to approach a solution o Ex. Cost: Materials purchasing… Cost driver: Number of purchased orders Activity Based Management (ABM) - Activity- based management is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization. - ABM helps identify non-value added activities in any process - It focuses on how work is done, not what is produced - It identifies and documents activities performed by organizations - Activity is the object of interest where ABC is concerned with secondary cost objects such as products or customers Strategic Implications of Activity-Based Information - Quality: Work performance by employees constitutes an organization’s activities - Cost: activities use resource (labor, tech., equipment, materials, supplies, utilities) - Time: the way activities are performed and resources dedicated to them. Why ABM? - Globalisation and Competitiveness o Increased global pressures force organizations to pay more attention to the interrelationships among processes and resources consumed
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