Activity-Based Costing/Management

Activity-Based Costing/Management

1. What is it?

   • Is an Information System developed in the 1980s to overcome some of the limitations of traditional cost accounting and to enhance its usefulness to strategic decision-making
     • Need an non-technical definition?
       • Activity-Based Costing/Management (ABC/M) it’s a way to show the financial information of a company, in which investors or interns from the company can decide if it’s a good idea to invest, reduce costs, set a new budget or some other important decisions, that will set the direction that the company is going to follow.
         • Strategic Value
           • It provides useful insight into decision-making processes because it not only supplies financial data, but examines processes and activities to identify value-added and nonvalue added activities

2. Objective

   • Show how a new ABC/M system that can serve as a useful information system to support effective operations decision-making processes. Proposing a conceptual framework, Operations Hexagon, and other factor that make it effective
     • Why?
       • To find better ways to apply managerial implications of an ABC/M system for various operations management decisions related to product planning and design, quality management and control, inventory management, capacity management and work force management

3. Functions

   • 2. Assigns costs to activities based on their consumption of resources, and then activity costs are assigned to products or services in proportion to a selected measure of their individual workloads
     • 1. Achieves improved accuracy in the estimation of costs, by using multiple cost drivers to trace the cost of activities
     • 3. It Examinates all processes (or activities) that are actually relevant to the production of a product and attempt to determine exactly what portion of each resource is consumed
       • 4. It helps to determine which products are profitable, which customers are the most valuable, whether processes are value-added or not, and where efforts toward improvement should be made

4. How? (Steps)

   • 1. Identifying resources: what is used to do work
   • 2. Identifying resource drivers: what is assigning the cost of the resources to activities based on effort expended
   • 3. Identifying activities: work, labors, assignments
   • 4. Identifying activity drivers: assigning the cost of the activities to products based on unique consumption patterns
   • 5. Identifying the objects of work: to what or for whom work is done

5. Conclusions

   • 1. Traditional cost accounting methods are inaccurate and misleading as these methods often allocate too much cost to one product and not enough to another.
   • 2. Create a more accurate representation of how activities performed in the creation of a product or service actually impact its cost. ABC/M systems examine processes or activities to determine their effects on costs.
   • 3. ABC/M system can be used by any firm which is able to identify activities that drive costs and allocate those costs to its particular products or services. Plus, it use multiple cost drivers to present a more accurate foundation for overhead allocation
   • 4. ABC/M systems can be integrated with TQM, employee empowerment, and many other changes taking place in business today. In the future, Companies would seem to be linking activities between business units together, creating an ABC/M system that provides information for the whole company

6. References

   • Activity-based costing/management and its implications for operations management. (2018). Retrieved from https://cesa.blackboard.com/bbcswebdav/pid-155061-dt-content-rid-906823_1/courses/20182-01061-SE-3/02%20Gupta%20and%20Galloway%202003%20ABC.pdf
     • Santiago De La Espriella