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Lecture Cost management: A strategic emphasis - Chapter 5: Activity-based costing and customer profitability analysis

After studying this chapter, you will know: Explain the strategic role of activity-based costing (ABC), describe ABC, the steps in developing an ABC system, and the benefits of an ABC system, determine product costs under both the volume-based method and the ABC method, explain activity-based management (ABM), | Activity-Based Costing and Customer Profitability Analysis Chapter Five 5-2 Learning Objectives Explain the strategic role of activity-based costing (ABC) Describe ABC, the steps in developing an ABC system, and the benefits of an ABC system Determine product costs under both the volume-based method and the ABC method Explain activity-based management (ABM) 5-3 Learning Objectives (continued) Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations Use an activity-based approach to analyze customer profitability Identify key factors for successful ABC/M implementation 5-4 Strategic Role of ABC Activity-based costing (ABC) vs. volume-based costing: Volume-based costing results may be distorted because indirect costs do not always occur in proportion to output volume Volume-based costing generally causes cross-subsidization of outputs (i.e., some products will be overcosted and others undercosted) Activity-based costing uses detailed information about the activities that make up indirect costs so that outputs are charged only for resources consumed by the activities needed to perform them 5-5 Volume-Based Costing May be a good strategic choice for some firms When the costs to be allocated are relatively small versus the directly traceable costs When the activities supporting production are relatively homogeneous across different product/service lines Volume-based costing is often used by paper product manufacturers, producers of agricultural products, other commodity firms, and professional service firms 5-6 ABC Terms Activity - a specific task or action of work done, such as production set-up Resource - an economic element needed or consumed in performing activities, such as salaries and supplies Cost driver - either a resource consumption cost driver or an activity consumption cost driver 5-7 ABC Terms Resource consumption cost drivers measure the amount of resources consumed by an activity, such as the number of . | Activity-Based Costing and Customer Profitability Analysis Chapter Five 5-2 Learning Objectives Explain the strategic role of activity-based costing (ABC) Describe ABC, the steps in developing an ABC system, and the benefits of an ABC system Determine product costs under both the volume-based method and the ABC method Explain activity-based management (ABM) 5-3 Learning Objectives (continued) Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations Use an activity-based approach to analyze customer profitability Identify key factors for successful ABC/M implementation 5-4 Strategic Role of ABC Activity-based costing (ABC) vs. volume-based costing: Volume-based costing results may be distorted because indirect costs do not always occur in proportion to output volume Volume-based costing generally causes cross-subsidization of outputs (i.e., some products will be overcosted and others undercosted) Activity-based costing uses detailed .