Abc System
C H A P T E R
F I V E
INTRODUCTION TO COST MANAGEMENT
Activity-Based Costing and Management
After studying this chapter, you should be able to . . .
1. Explain the strategic role of activity-based costing 2. Describe activity-based costing (ABC), the steps in developing an ABC system, and the benefits and limitations of an ABC system 3. Determine product costs under both the volume-based method and the activity-based method and contrast the two 4. Explain activity-based management (ABM) 5. Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations 6. Use an activity-based approach to analyze customer profitability 7. Identify key factors for successful ABC/M implementation
PART I
Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin This chapter has a lot to do with implementing the spirit of Benjamin Franklin’s observation—in cost management terms—that it really does matter how accurately you calculate a cost. Why? Having accurate costs is important for a variety of reasons: a company might find that it has a difficult time determining which of its products is most profitable. Alternatively, it finds its sales increasing but profits declining and cannot understand why. Perhaps the company keeps losing competitive bids for products and services and does not understand why. In many cases, accurate cost information is the answer to these questions. Accurate cost information provides a competitive advantage. It helps a company or organization to develop and to execute its strategy by providing accurate information about the cost of its products and services, the cost of serving its customers, the cost of dealing with its suppliers, and the cost of supporting business processes within the company.
The Strategic Role of Activity-Based Costing
LEARNING OBJECTIVE 1
Explain the strategic role of activity-based costing
120
Activity-based costing (ABC) is a method for determining
F I V E
INTRODUCTION TO COST MANAGEMENT
Activity-Based Costing and Management
After studying this chapter, you should be able to . . .
1. Explain the strategic role of activity-based costing 2. Describe activity-based costing (ABC), the steps in developing an ABC system, and the benefits and limitations of an ABC system 3. Determine product costs under both the volume-based method and the activity-based method and contrast the two 4. Explain activity-based management (ABM) 5. Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations 6. Use an activity-based approach to analyze customer profitability 7. Identify key factors for successful ABC/M implementation
PART I
Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin This chapter has a lot to do with implementing the spirit of Benjamin Franklin’s observation—in cost management terms—that it really does matter how accurately you calculate a cost. Why? Having accurate costs is important for a variety of reasons: a company might find that it has a difficult time determining which of its products is most profitable. Alternatively, it finds its sales increasing but profits declining and cannot understand why. Perhaps the company keeps losing competitive bids for products and services and does not understand why. In many cases, accurate cost information is the answer to these questions. Accurate cost information provides a competitive advantage. It helps a company or organization to develop and to execute its strategy by providing accurate information about the cost of its products and services, the cost of serving its customers, the cost of dealing with its suppliers, and the cost of supporting business processes within the company.
The Strategic Role of Activity-Based Costing
LEARNING OBJECTIVE 1
Explain the strategic role of activity-based costing
120
Activity-based costing (ABC) is a method for determining