202 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS
202 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS
Exh ibit 5-9 is a graph ical represen tation of th e data collected for th e fou r activity cen tres iden tified in Step 1. For each activity cen tre, data collected in clu ded traceable costs an d th e ph ysical flow of cost-driver u n its. For exam ple, Exh ibit 5-9 sh ows traceable costs of $235,777 for th e accou n t billin g activity. Traceable costs in clu de th e costs of th e prin tin g m ach in es ($55,000 from Exh ibit 5-7) plu s portion s of th e costs of all oth er resou rces th at su pport th e billin g activ- ity (paper, occu pan cy, com pu ter, an d billin g labou r). Notice th at th e total trace- able costs of $205,332 + $35,384 + $235,777 + $88,847 = $565,340 in Exh ibit 5-9 equ als th e total in direct costs in Exh ibit 5-7. Next, th e ph ysical flow of cost- driver u n its was determ in ed for each activity or cost object. For each activity cen - tre, th e traceable costs were divided by th e su m of th e ph ysical flows to establish
a cost per cost-driver u n it.
Calculate and interpret the new activity-based information. Th e activ- ity-based cost per accou n t for each cu stom er class can be determ in ed from th e data in Step 3. Exh ibit 5-10 sh ows th e com pu tation s.
Step 4.
EX H I B I T 5 - 9
ABC System
Billing Department Activity Centres Total Traceable Cost, $565,340
Traceable Costs: Physical flow of cost-driver units:
Account Inquiry
Account Verification $205,332
Correspondence
Account Billing
3,300 labour hours
20,000 accounts $62.22 per
2,800 letters
2,440,000 lines
$4.44 per labour hour
Cost objects: Physical flow of cost-driver units for each cost object:
1,800 labour hours 1,500 labour hours 1,800 letters
Chapter 5 Cost Allocation and Activity-Based Costing Systems
O BJECTI V E 1 0
Exam in e th e last tw o item s in Exh ibit 5-10. Notice th at tradition al cost- in g in dicated h igh er costs for th e h igh -volu m e residen tial accou n ts an d su b-
Calculate activity-
stan tially low er costs for th e low -volu m e com m ercial accou n ts. Th e ABC cost
based costs for cost
per accou n t for residen tial accou n ts is $2.28, w h ich is $1.41 less th an th e
objects.
$3.69 cost gen erated by th e tradition al costin g system . Th e cost per accou n t for com m ercial accou n ts is $14.57, w h ich is $8.42 m ore th an th e $6.15 cost from th e tradition al cost system . Man agem en t’s belief th at tradition al costin g w as u n dercostin g com m ercial accou n ts w as su pported. PPC’s m an agem en t n ow h as th e cost in form ation th at th ey th in k is preferred for plan n in g an d decision -m akin g pu rposes.
Th ese resu lts are com m on w h en com pan ies perform activity-based cost- in g stu dies—h igh -volu m e cost objects w ith sim ple processes are overcosted w h en on ly on e volu m e-based cost driver is u sed. In th e BD, th is volu m e-based cost-driver w as th e n u m ber of in qu iries. Wh ich system m akes m ore sen se— th e tradition al allocation system th at “spreads” all su pport costs to cu stom er classes based solely on th e n u m ber of in qu iries, or th e activity-based-costin g sys- tem th at iden tifies key activities an d assign s costs based on th e con su m ption of u n its of cost drivers ch osen for each key activity? For PPC, th e probable ben efits of th e n ew activity-based-costin g system m ay ou tweigh th e costs of im plem en t- in g an d m ain tain in g th e n ew cost system . However, th e cost-ben efit balan ce m u st be assessed on a case-by-case basis.
P E R S P E CT I V E S O N
D E CI S I O N - M A K I N G
The ABCs of Profitability
Today, many organizations are using
the model to justify several strategic initia-
Activity Based Costing (ABC) to make
tives, which led to even greater bottom-
strategy changes and to cut costs, and the
lin e im provem en ts. ABC was th en rolled
process may end up affecting a broad range
ou t to th e m in in g an d m illin g processes.
of operations: simple ones, like the way a
Today, strategic plan n in g, bu dgetin g, an d
truck delivery is unloaded at a store, or
perform an ce m easu rem en t h ave all been
major ones, such as whether to outsource
u pgraded.
direct store deliveries. ABC shows the indi-
• A food processor and wholesale distri-
vidual impact of each decision, and the
bution company needed to understand the
impact of one decision on another. A com-
economics of its processing and logistics
pany may even discover that changing the
activities. Man agem en t su spected th at
way deliveries are processed makes out-
some customer groups, products, and deliv-
sourcing them uneconomical.
ery routes were losing money. As it turned
Activity-Based Costing
ABC can produ ce resu lts. Here are
out, all products contributed to the bottom
www.abctech.com
som e exam ples:
lin e, bu t som e cu stom ers were in deed
• A m in in g com pan y n eeded to redu ce
unprofitable. The improvement opportuni-
logistics costs an d to assess th e bottom -lin e
ties that ABC discovered amounted to ten
im pact of som e proposed capital in vest-
times the cost of the pilot project.
m en ts. It con du cted an ABC pilot project wh ich focu sed on cu stom er service an d
Source: Hen ry Kolisn ik, “Th e ABCs of
distribu tion . Th e stu dy fou n d en ou gh
Profitability,” Canadian Transportation
“qu ick h it” im provem en ts to pay for th e
Logistics , March 1995, p. 50.
cost of th e pilot project. Man agem en t used