4 - 1 ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Activity-Based Costing

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Learning Objective 1 Understand the main differences between traditional and activity-based costing systems and why ABC systems provide value to managers.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Traditional Cost System All Unallocated Value Chain Costs Direct Material Resource Direct Labor Resource All Indirect Resources Products Direct Trace Direct Trace Cost Driver Unallocated

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Two-Stage Activity-Based Cost System All Unallocated Value Chain Costs Direct Material Resource Direct Labor Resource Indirect Resource A Products Direct Trace Direct Trace Activity 1 Unallocated Other Direct Resources Indirect Resource Z Activity 10 %% Cost Driver Cost Driver

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Activity-Based Costing Understanding the relationships among activities, resources, costs, and cost drivers is the key to understanding ABC and how ABC facilitates managers’ understanding of operations.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Example of Activities and Cost Drivers: Activities: Account billing Bill verification Account iniquity Correspondence Cost Drivers: No. of lines No. of accounts No. of labor hours No. of letters Activity-Based Costing

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Learning Objective 2 Identify the steps involved in the design and implementation of an activity-based costing system.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Designing and Implementing an Activity-Based Costing System Determine cost of activities, resources, and related cost drivers. Develop a process-based map representing the flow of activities, resources, and their interrelationships. Step 1 Step 2

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Designing and Implementing an Activity-Based Costing System Collect relevant data concerning costs and the physical flow of the cost-driver units among resources and activities. Step 3

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Designing and Implementing an Activity-Based Costing System Calculate and interpret the new activity-based information. Using an activity-based costing system to improve the operations of an organization is activity-based management (ABM). Step 4

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Activity-Based Management Activity-based management aims to improve the value received by customers and to improve profits by identifying opportunities for improvements in strategy and operations.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Activity-Based Management l A value-added cost is the cost of an activity that cannot be eliminated without affecting a product’s value to the customer. l In contrast, non-value-added costs are costs that can be eliminated without affecting a product’s value to the customer.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Learning Objective 3 Use activity-based cost information to improve the operations of an organization.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Using ABC Information Activity-based management… provides costs of value-added and non-value-added activities. improves managers’ understanding of operations.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Learning Objective 4 Understand cost accounting’s role in a company’s improvement efforts across the value chain.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Cost Accounting and the Value Chain A good cost accounting system is critical to all value-chain functions from research and development through customer service.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton End of ABC