Accounting for Manufacturing Decisions

Class #10

Bala V. Balachandran

Activity Based Costing (ABC)

ACCT-439

BALA v. BALACHANDRAN

Cost Management
Current Systems May Not:
Identify the true total product cost because of unnecessary allocation and complexity. Identify and report cost of quality. Provide cost and performance information to support strategic goals. Measure or reward desired performance. Focus on cost prevention of potential non-value added costs. Identify and isolate non-value added activities.

ACCT-439

BALA v. BALACHANDRAN

Bill of Activities Under traditional accounting

Resources
DL MOH DM

Products

Customers

People

P1

C30 C1

Vacation

P2

C2

Machine Hours Pn C30

ACCT-439

BALA v. BALACHANDRAN

Bill of Activities Under Activity Based Costing

Resources
MOH

Activities
DL

Products
DM

Customer Based Activities

B1

Customers

People

A1

P1

C30 C1

Vacation

A2

P2

B2

C2

Machine Hours A10 Pn B10 B10 C30

In ABC we assume that activities consume resources

5 ACCT-439 BALA v. BALACHANDRAN

Cost Management
Why are activities so important for analysis?
They are actionable; They are what the company does. They consume resources which are consumed by products and processes. They can be easily understood by diverse groups of people and their cost can be tracked and measured by the beneficiary. They link planning and control and integrate financial and nonfinancial performance measures. They highlight cross-departmental interdependencies. They facilitate understanding of cost drivers.
6 ACCT-439 BALA v. BALACHANDRAN

Cost Management
Benefits of Activity Analysis
Managers better understand the workload profile of their area. Clarifies customers/supplier relationship, including crossdepartmental dependencies. (Total Value Chain). Causes a review of existing organizational procedures and responsibilities and clarifies the causes and effects of activities. Fosters plans for improvement with many linkages. Establishes basis for tracing costs and implementing activity accounting.

ACCT-439

BALA v. BALACHANDRAN