-
ABC
1.
compare
the
overhead
allocations
between
the
traditional
methods
and ABC and explain
the changes
【
in practical issues
】
?
whether the
allocations have changed a lot : overheads may be
dominated
by one cost of which the cost
driver is still the traditional basis (eg: labour
hours)
, thus no
significant difference will result from this
change
?
the
major
effect
may
be
for
one
cost
which
carry
a
relatively
high
proportion of the quality control cost.
?
Some overheads may cause little change
seemingly, but it hides the very
big
difference
in
treatment,
even
though
the
proportion
of
this
cost
is
minor .
?
Review each of
the overhead cost items in turn in terms of
proportions in
total overhead value,
proportions of cost driver numbers
2.
discuss
the
reasons
why
ABC
is
more
suitable
in
the
modern
manufacturing environment than
traditional methods
【
in theory
】
?
traditional
methods
allocate
overheads
based
on
some
volume-
related
measure of activity
?
in
traditional
business,
indirect
costs
constituted
a
relatively
small
proportion of total product costs
?
in
modern
manufacturing
environment,
indirect
costs
constituted
a
relatively
high
proportion
of
total
product
costs.
【
shorter
and
more
frequent
production runs which increases the frequency of
production line
set-ups wide-spread
use of computer control and automation in place of
direct
labour
;
increase
use
of
JIT
and
customer-
led
manufacture
which
lead to quality control costs and
production planning costs forming a higher
proportion of total costs;
】
?
activity
and
costs:
traditional
costing
failed
to
consider
the
relationship
between
costs,
activities
and
products.
In
this
way,
the
allocation
may
tranfer a disproportionate amount of
costs to high volume products which
in
fact just consume fewer resource.
Whereas ABC allows the overhead
costs incurred by activities to be
related to product cost using cost drivers
derived from the activities.
?
improve cost control: by identifying
and using more accurate and different
but relevant cost drivers according to
different activities, ABC can lead to
more
detailed
product
cost
information.
In
this
way,
manager
is
able
to
seek
to
control
costs
by
controlling
the
activities.
in
other
words,
ABC
provides the manager with a more deep
insight of how the costs occurred.
【
for
example,
can
optimise
the
number
of
production
runs
in
order
to
minimise set-up
costs
】
?
better
information
on
product
profitability:
better
decision,
better
pricing,
better product
promotion, better profitability;
?
activity-based
budgeting:
identify
the
required
level
of
production
and
support activity , eliminate slack
?
explain the features in traditional
environment and in modern environment
respectively
?
give the implications (advantages) of
using ABC in a modern environment,
quote some examples
3.
conditions
under
which
the
introduction
of
ABC is
likely
to
be
most
effective :
?
general
conditions:
significant
overheads
to
allocate
between
different
products the
availability of sophisiticated information
retrieval systems
?
product mix : at least two products
?
retrieval
system
:
as
the
production
systems
are
far
more
complex
in
modern
environment, it should be supported by some
computer services to
facilitate the
monitoring of costs and capture more information .
4. implementaion problems in
introducing ABC at first time
?
lack of
understanding, therefore not fully accepted
?
difficulty in
identifying cost drivers: abtaining enough
information (support
services, like
retrieval system
—
costly ),
multi-cost drivers
–
subjective
?
lack of appropriate accounting records
: a new set of accounting records
which
may be not available , thus has to be installed
–
time consuming
5.
divisional problems towards implementing ABC
ABC may change the profit of a product
in terms of finance, but its implications
can vary between different divisions
?
Finance
director
—
determine the
viability of a product : a product may turn
out to be a loss in ABC, if it consumes
more activities on the basis of more
cost drivers, rather than just
traditional labour hours. It is doubtful whether
selling the product is viable.
?
Marketing
director
—
determine
the
reliability
of
a
contract
:
incremental
cost; it is the
future that matters, rather than just those
historic experience
?
Manageing director
–
manage and control costs
occurred: cost per activity
may not be
constant as the activity is repeated
【
a learning
curve
】
; some
costs do not vary with any cost drivers
【
eg:
depreciation
】
?
Chairman
–
overall profit : this may
be the same no matter which method is
adopted.
6. explain the concept of ABM
?
focus on underlying causes of costs,
the activities of the business. Costs
are
collected
and
reported
by
activity,
through
the
use
of
cost
drivers
in
ABC.
7. explain
the concept of ABC
?
?
?
?
costing
and
monitoring
of
activities
that
involves
tracing
resource
consumption
and
costing
final
outputs.
ABC
changed
the
focus
of
cost
accumulation
from
processes
to
activities.
Using
different
cost
drivers
to
attach
activity costs to outputs.
There
is
no
attempt
to
split
fixed
and
variable
costs,
or
to
use
―
blanket
‖
absorption bases.
In this
way, the final costs that are attributed to a
product can give a fairer
reflection of
the consumption of resources by that product.
Pricing
–
sales strategy
–
performance measurement
8. illustrate
the benefits of ABM
?
better understanding of costs and their
causes, leading to more effective
cost
management
?
better planning leads to better use of
resources;
?
highlights opportunities to reduce or
eliminate non value-adding activities;
?
value-analysis
process can improve product design, more efficient
use of
material and labour, which will
all add to cost reductions but improve the
quality of products;
?
identification
of cost driver rates gives a fair and useful
measure of the cost
efficiency
which
may
be
used
in
performance
appraisal.
【
exclude
the
uncontrollable
activities
which
can
not
be
the
responsibility
of
the
manager
】
9. illustrate the benefits
of ABC
?
better
insight into what drives overhead costs
?
better understanding of the production
process
?
recognise costs that are not related to
volume
?
more
accurate product costs: concentrate on more
profitable products
?
better informed
decisions : pricing; budgeting;
?
help idenifty
the value-added and non value added costs and
eliminate the
non value-added ones to
improve the efficiency
?
can be used not
only for production costs but also non-production
costs,
like servicing costs
?
lead to a more
accurate assessment of management : since the
manager
’
s
performance
should
be
judged
on
controllable
factors.
Thus
if
the
assessment is involved with some
uncontrollable factors, it will be unfair
and
demotivate
to
managers.
ABC
is
often
claimed
to
rest
on
a
more
accurate
information
base,
rather
than
an
arbitrary
allocation.
Thus,
it
allows
to align management decisions with their
consequences. Also, ABC
tracks
costs
to
the
causes
of
the
costs
which
they
links
to
management
decisions.
10. illustrate the
limitations of ABC
?
the
process
of
setting
up
an
ABC
system
will
be
complex,
not
easy
to
?
?
?
?
understand , thus may not be accepted
fully
may
not
have
the
correct
accounting
records,
to
install
the
new
system
may be
costly and time consuming
may not have the advanced retrieval
system to capture enough information
for
monitoring
and
controlling;
to
install
this
system
may
incur
far
more
costs
than the benefits generated.
unlikely
to
relate
all
overheads
to
specific
activities,
some
activities
may
have
no
cost
drivers,
or
have
more
than
one
potential
cost
driver
【
subjective to set one
only
】
there are
still simplications and assumptions to be made in
its application
【
choice of the cost
drivers
】
life-cycle
costing
1.
explain the
nature of the product life cycle concept
?
introductory
stage:launch
【
pricing
strategy
】
;based
on
customers
’
awareness
and
trial
of
the
product;
be
accompanied
by
extensive
marketing
and
promotion;
a
high
level
of
set-up
costs,
R&D,
product
design costs will incur;
?
growth
stage
:
after
the
product
has
been
accepted;
sales
volume
increases
dramatically; unit costs fall as the economies of
scale; price may
fall; marketing and
promotion will continue;
?
maturity stage:
market saturation
【
reach the
mass market
】
; sales growth
slows; the initial fixed costs will be
all recovered; marketing and distribution
economies achieved; price competition
and product differentation will start;
figure
out
ways
to
extend
the
life
of
the
product
【
upgrade
the
product;
launch product in another market
segment; sell accessories
】
?
decline
stage
:
the
product
will
move
towards
obsolescence
as
it
is
replaced
by
new
and
better
alternatives;
the
product
will
be
abandoned
when the profit
falls to an unacceptable level; promotion may help
to clear
the stock; a replacement
product will need to develop which incurres new
R&D and design costs;
?
this question is just to outline the
four main stages of a
product
’
s life and
state the features in each stage
2.
issues would
be considered by managers in each stage
?
introduction
stage:
high
unit
costs,
relatively
low
sales
volume,
the
potential problem of
rejection by the market conspires to make this
stage
the riskest
?
growth stage:
competitors will be prompted to enter the market;
develop
more new efficient production
methods
?
maturity
stage:price
competition
is
at
its
keenest,
the
price
will
be
the
lowest;
unit
cost
will
be
at
the
lowest
level;
the
manufacturing
process
?
should remain
lean and well managed. Value analysis may be
undertaken.
Decline stage:
it is still possible to make profits for a short
period before the
rapidly
dwindling
sales
volumes.
May
withdraw
the
product
from
the
market.
?
Introduction
stage
should
do
with
―
pricing
strategy
―
and
target
costing;
growth stage could
do with target costing and ABC to reduce the unit
cost;
maturity
stage
could
do
with
target
costing
and
ABC
as
well
for
value
analysis to reach the lowest price.
?
Almost
every
stage
will
do
with
―
marketing
and
advertising
‖
.
Introduction
stage
–
bring more attention from
the potential customers; growth stage
–
increase
brand
awareness;
maturity
stage
—
increase
brand
loyalty
and
develop
a
sense
of
prestige/
quality;
decline
stage
–
promotion
for
products left to clear the stock.
3.
explain life
cycle costing
?
profiling of cost over a
product
’
s life, including
the pre-production stage
?
tracking
and
accumulating
the
actual
costs
and
revenues
attributable
to
each
product
from
inception
to
abandonment.
The
final
profitability
of
a
given
product is determined at the end of its life,
while accumulated costs
at any stage
can be compared with life-cycle budgeted costs,
product by
product, for the purposes of
planning and control.
?
If a high proportion of a
product
’
s costs incurres at
the very early stages of
the life
cycle,
【
eg:electronic
goods
—
degisn
costs
】
the
accounting system
should compare the
revenues from a produc with all the costs
inccurred
over the entire product life
cycle.
4.
benefits from life cycle
costing
?
focus
on
the
time
to
market
as
well
as
money
which
is
a
key
factor
to
generate profit
?
monitor over the life cycle which can
respond to any deviation rapidly and
stop a project early. Thus resources
can be allocated in a more efficient
way.
?
emphasie on
timescale which enables the company to keen on
recovering
the fixed costs committed to
at the early stages.
?
Pricing decisions can be based on total
life-cycle costs rather than simply
the
costs for the current period.
?
Reinforces
the
importance
of
tight
control
over
locked-in
costs,such
as
R&D
, design costs, since it tracks and monitors
cumulative costs
?
Trace
costs
of
each
product
separately
and
compare
with
respective
product revenues.
In this way, each product
’
s
profitability can be assessed
separately.