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Lecture Fundamentals of cost accounting - Chapter 10: Fundamentals of cost management

In this chapter, students will be able to understand: explain the concept of activity-based cost management; use the hierarchy of costs to manage costs; describe how the actions of customers and suppliers affect a firm’s costs; use activity-based costing methods to assess customer and supplier costs;. | Fundamentals of Cost Management Chapter 10 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin We start the study of the Fundamentals of Cost Management with a review and overview of information necessary for managing costs. Using Activity-Based Cost Management to Add Value Activity-based cost management uses activity analysis in decision making. Activity-based costing focuses on activities in allocating overhead costs to products. Activity-based management focuses on managing activities to reduce costs. L.O. 1 Explain the concept of activity-based cost management. 10 - Activity-based cost management uses activity analysis in decision making. In Chapter 9, you saw that activity-based costing focuses on activities. Activity-based management, on the other hand, focuses on managing activities. Using Cost Hierarchies L.O. 2 Use the hierarchy of costs to manage costs. Cost Example Supplies Lubricating oil Machine repair Hierarchy Level Volume related Cost Driver Example Direct labor cost Machine-hours Number of units Setup costs Material handling Shipping costs Batch related Setup hours Production runs Number of shipments Compliance costs Design and specification costs Product related Number of products General plant costs Plant admin. costs Facility related Direct costs Value added 10 - In Chapter 9 we saw that in the activity-based costing system, the first stage allocates cost to activities, not departments. Now we will see why what might seem like a small difference has important implications for cost management. Costs that are strictly volume related can be controlled by focusing on the volume of units. At the other extreme, facility related costs are capacity-related and are essentially fixed and require a longer time horizon to change than do decisions to change unit-level costs. Batch and product related costs are affected by the way managers manage activities. Managing the Costs of Customers and . | Fundamentals of Cost Management Chapter 10 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin We start the study of the Fundamentals of Cost Management with a review and overview of information necessary for managing costs. Using Activity-Based Cost Management to Add Value Activity-based cost management uses activity analysis in decision making. Activity-based costing focuses on activities in allocating overhead costs to products. Activity-based management focuses on managing activities to reduce costs. L.O. 1 Explain the concept of activity-based cost management. 10 - Activity-based cost management uses activity analysis in decision making. In Chapter 9, you saw that activity-based costing focuses on activities. Activity-based management, on the other hand, focuses on managing activities. Using Cost Hierarchies L.O. 2 Use the hierarchy of costs to manage costs. Cost Example Supplies Lubricating oil Machine repair Hierarchy Level .