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Theories Underpinning ABC | ===Theories Underpinning ABC=== | ||
* Realization that o/h do not just occur but are caused by activities but drive the costs. | * Realization that o/h do not just occur but are caused by activities but drive the costs. | ||
* Realizes that costs are not necessarily volume driven but driven by activities | * Realizes that costs are not necessarily volume driven but driven by activities | ||
| Line 9: | Line 9: | ||
Benefits | ===Benefits=== | ||
* High level of competition | * High level of competition | ||
* Diverse product range | * Diverse product range | ||
* High level of indirect costs | * High level of indirect costs | ||
Using ABC | ===Using ABC=== | ||
It is distinguished from Full Costing by the | It is distinguished from Full Costing by the | ||
* Greater number of Cost Centers | * Greater number of Cost Centers | ||
| Line 20: | Line 20: | ||
* It based on the activity (product) and not department | * It based on the activity (product) and not department | ||
Designing ABC | ===Designing ABC=== | ||
* Look for what Kaplan and Cooper call L-t Variable costs like Set Ups, which vary with Volume | * Look for what Kaplan and Cooper call L-t Variable costs like Set Ups, which vary with Volume | ||
* Identify the major activities | * Identify the major activities | ||
| Line 28: | Line 28: | ||
* Duration drivers – set up hours | * Duration drivers – set up hours | ||
Unit level activities – direct labor hours | *Unit level activities – direct labor hours | ||
Batch related hours – purchase orders | *Batch related hours – purchase orders | ||
Product sustaining activities – Engineering | *Product sustaining activities – Engineering | ||
Customer sustaining - marketing | *Customer sustaining - marketing | ||
Facility sustaining – plant management and property costs | *Facility sustaining – plant management and property costs | ||
Cost v Benefit Considerations | ===Cost v Benefit Considerations=== | ||
* ABC is expensive | |||
* Therefore if the cost of errors exceeds the cost of implementing ABC then go ahead and implement | |||
* ABC should be used where there is intensive competition | |||
* Non-volume related costs are high | |||
* Diverse range of products | |||
Provides more accurate costing data than absorption costing | ===Benefits of ABC=== | ||
Appropriate for establishing cots for diverse products or activities | * Provides more accurate costing data than absorption costing | ||
Reduces the need for special studies to obtain relevant cost info | * Appropriate for establishing cots for diverse products or activities | ||
Criticisms of ABC | * Reduces the need for special studies to obtain relevant cost info | ||
===Criticisms of ABC=== | |||
* Identifying cost drivers is time consuming and costly | |||
* Like Full costing it does not use relevant costs for decision-making (ignores opportunity costs) | |||
* But it does provide l-t avg cost | |||
* Evidence that its use is declining | |||
* Allocations are always arbitrary in the end | |||
* Past data is out of date or no longer relevant | |||
* Is the emphasis on costs that important when cost plus pricing is rarely used | |||
* May overly focus on management by numbers | |||
* Companies have tried to determine too many cost drivers | |||
Latest revision as of 12:15, 13 January 2011
Theories Underpinning ABC
- Realization that o/h do not just occur but are caused by activities but drive the costs.
- Realizes that costs are not necessarily volume driven but driven by activities
- Assumes that o/h can be analyzed and cost drivers identified
- A cost pool is est. for a cost driver – a pool of costs
- Indirect costs can not be assumed to be fixed
- There is a need for a periodic attention-direction reporting system
- Special studies are (last lesson) are almost impossible when you have got 100 or so products. E.g. to drop 1 product would not affect FC but drop 10 and it would. Therefore cannot assume decisions are independent
Benefits
- High level of competition
- Diverse product range
- High level of indirect costs
Using ABC
It is distinguished from Full Costing by the
- Greater number of Cost Centers
- Greater number of second stage cost drivers
- It based on the activity (product) and not department
Designing ABC
- Look for what Kaplan and Cooper call L-t Variable costs like Set Ups, which vary with Volume
- Identify the major activities
- Assign costs to cost pools
- Determine the cost driver for each activity
- Transaction drivers – Purchase orders
- Duration drivers – set up hours
- Unit level activities – direct labor hours
- Batch related hours – purchase orders
- Product sustaining activities – Engineering
- Customer sustaining - marketing
- Facility sustaining – plant management and property costs
Cost v Benefit Considerations
- ABC is expensive
- Therefore if the cost of errors exceeds the cost of implementing ABC then go ahead and implement
- ABC should be used where there is intensive competition
- Non-volume related costs are high
- Diverse range of products
Benefits of ABC
- Provides more accurate costing data than absorption costing
- Appropriate for establishing cots for diverse products or activities
- Reduces the need for special studies to obtain relevant cost info
Criticisms of ABC
- Identifying cost drivers is time consuming and costly
- Like Full costing it does not use relevant costs for decision-making (ignores opportunity costs)
- But it does provide l-t avg cost
- Evidence that its use is declining
- Allocations are always arbitrary in the end
- Past data is out of date or no longer relevant
- Is the emphasis on costs that important when cost plus pricing is rarely used
- May overly focus on management by numbers
- Companies have tried to determine too many cost drivers
