1. Advanced Cost Accounting Lectures 2017
Janne Järvinen
Professor, Management Accounting and Control Systems
P.O. BOX 4600, University of Oulu, FINLAND • tel   , fax •

2. Activity Based Costing ABC extensions Time Driven ABC
Lectures 5 and 6
Activity Based Costing
ABC extensions
Time Driven ABC
P.O. BOX 4600, University of Oulu • tel. (08) , fax (08) •

3. Activity-based costing
(i) Activity maps
(ii) Cost driver analysis
(iii) Attention to capacity
(iV) Many-dimensional cost objects
-strategic customer analysis

4. (i) Representing organisation and its costs as activities
Activity vs. task
Activity vs. process
all-encompassing, exclusive
Resources are needed to perform the activities
=>physical units
=>link accounts to the physical units
=>influence of price changes vs. changes in productivity

5. Activities
There are a multitude of tasks: these must be aggregated to activities
=>activity is a homogeneous group of tasks
Intuition and a deep field knowledge required
bottom-up
requires participation, costing no longer an accounting function (cultural issues)

6. Stage 1: Direct labour and materials can be traced directly to
Other Indirect
resources
Indrect Labour
Actiivities
Activities
Cost object 1
Energy
Cost object 2
Cost object 3
Cost object 4
Direct cost
Stage 1:
Stage 2:
Direct labour
and materials
can be traced
directly to
cost objects
. .
First stage drivers
Second stage drivers

7. ABC Cost Accumulation and Allocation
1. Unit-level costs are directly assigned to products.
2. Indirect costs are accumulated in the appropriate activity cost pools.
3. Indirect costs are allocated from the activity cost pools using the batch, product, and production-sustaining cost drivers.

8. Cost variability Business Fixed cost. Product level Batch level
-Cannot
influence-
change according
to complexity of
processes -
change in
batches
proportion to
volume
Business
Cannot influence-
Use overhead rates to
allocate
-change only if
capacity is
changed
Fixed cost.
Product
level
Batch
level
-linear in
proportion to
volume
Volume
level
Variable
cost
Traditional
ABC

9. Hierarchy of cost drivers
General management
Building maintenance
accounting & admin.
Business (facility)-level
Process design
Product marketing
PC-support, maintenance
Product level
Setups
Billing, buying
Preparing course material
Batch level
Volume
level
Production
Customer service

10. Unit-level Costs
Defined: activities performed at least once for each unit of product
Total amount of unit-level costs is a linear function of the quantity produced.
Examples:
Direct labor and direct material
Machine servicing related to number of units produced

11. Batch-level Costs
Defined: activities performed once for each batch of products
Batch-level costs are independent of the number of units in the batch.
Examples:
Indirect labor, such as production supervisors
Machine set-ups
Moving batches

12. Product-level Costs
Defined: activities that support production of a product type or model
Product-level costs do not vary with the number of batches produced.
Examples:
Engineering support
Equipment usable for only one product line

13. Production-sustaining Costs
Defined: all remaining activities required for overall operation of production facility
Production-sustaining costs do not depend on number of units, batches, or product lines.
Examples:
Plant security, insurance, general maintenance
Plant accounting and administration

14. (ii) Measuring cost drivers
Allocation base
Activities consume resources, resources exist because of something must be done
=> 1. stage
(Cost Drivers, Resource Drivers)
Because activities are performed to produce products, they can be allocated to them
=> 2. stage
(Cost Drivers, Activity Drivers)

15. 2nd stage driver 1. Activity volume drivers 2. Weighed drivers
e.g. no of invoices + 2nd-time notifications
3. Situational driver
the cost/benefit issue
ERP system
4. Motivational driver
(ABM-systems)
used for controlling purposes rather than accurate costing

16. (iii) Capacity and capacity usage
Beware of unit cost (Organisational type determines which capacity concept to use
usage of machinery vs. emergency capacity
Often difficult to justify to personnel
Should excess capacity be allocated to products ?
can excess capacity be avoided?
In ABC there are many practises

17. Approaches to capacity
Use absorption costing
just interpret the cost reports correctly
Use normal costing
determine normal production volume, use it as a denominator for part of the costs
Use ABC to calculate the cost of unused capacity

18. Cost allocation models vs. models of resource consumption
Cost allocation models ’push systems’
Allocate costs to cost objects
Cost often derived from financial accounting
Resource consumption models ’pull systems’
Cost = cost of resources used + overcapacity
Cost is a standard cost multiplied by usage (p*q)

19. Push and pull systems
Traditional cost systems
Modern cost systems
Cost allocation systems
Job-order costing systems, process costing systems
Activity-based costing with 100% of resources and activity costs allocated
Models of resource consumption
Standard Costing
ABC systems with cost of unutilized capacity, TDABC

20. Case Electronic Parts
Compare the costing systems labelled as ’industrial ABC’ and ’Full ABC’

21. (iv)Cost object Product costing (vs. project costing)
Product definitions
Customers differ in resource consumption, but often in practise the products must be the same
Customer costing
=> link to strategy

22. Product profitability vs customer profitability
Cumulative profit graphs
Product segmentation vs. customer segmentation

23. Customer-focused ABC model
1st stage allocation
2nd stage allocation
Resources
allocation
by sales
Product-
related
activities
Product
Customer
Product
Resources
Customer-
related
activities
Customer

24. Structure of customer profitability report
...but this profitability report is only two-dimensional
(product profitability and customer profitability)

25. ABC and Decision Making
ABC improves pricing decisions because product costs are more accurate estimates of opportunity cost.
Low-volume high-complexity products should get higher prices or be dropped.
ABC focuses attention on reducing use of activities that are most associated with costs.

26. ABC and Decision Control
ABC requires more monitoring.
Time to identify and measure activities
Meetings to resolve disputes over activity drivers
ABC shifts decision rights over activity drivers to lower-level managers with specialized knowledge of the relation between costs and activities.
Departmental managers could pick cost drivers that maximize their performance rewards.

27. ABC extensions
Activity-based management systems Activity-based budgeting systems Time-driven ABC systems

28. Activity-based management systems
ABM systems draw on activity-based costing to
Combine cost information with process models (operative emphasis)
Focus on value-adding activitities
Create performance measures to improve effectiveness and quality

29. Activity-based budgeting systems
Resources
Resource
drivers
Activities
Activity
Cost
object 1
object 2
object 3
object 2

30. ABB
Estimate sales and production (+target inventory) by product and customer
Estimate the demand of activities caused by the estimated sales (and production)
Calculate the resources consumed
Calculate, how much resources are available, and how resources can be increased (if demand increases) or cut
Determine activity capacity and analyse the need to invest or divest

31. TDABC Simplification of the original ABC model
Emphasis on resource consumption (rather than cost allocation)
Basic elements :
Cost of resources committed (p)
Unit times for performing transactional activities (q)
The practical capacity of committed resources

32. TDABC calculation example
Std. min
Std. Cost €
No of transactions per year
Total min
Total cost €
Handling customer orders 8
7,2
49 000
Process customer complaints 44
39,6
1 400
61 600
55 440
Perform credit checks 50 45
2 500
Utilized capacity
Cost of utilized capacity
Unutilized capacity
51 400
Cost of unutilized capacity
46 260
Total €

33. TDABC time equation components
Time needed to perform an activity Standard time to perform the basic activity e.g. 8 minutes Estimated time for incremental activity (process variations etc) Quantity of incremental activity

34. Importantly
Time-Driven ABC allows to adapte the Unit time base on the complexity of the transaction.
e.g. Package time = (if special handling required) (if shipping by air)

35. An example of time equation
if([Transaction].[DISTCHANNEL]== 0, 2.5, 0)+ if([Product].[PRODUCT]==”PRODUCT A", 1, 0)+ if([Product].[PRODUCT]==”PRODUCT B", 1, 0)+ Lookup(CODE, 331, 0, 330, 0.5, 930, 3.5, 430, 3.5, 440, 2, 940, 3.5, 3.5)+ if([Transaction].[ADDITWORK] =="ZA-APPS" OR [Transaction].[ADDITWORK] == "", 0, 5) * if([Transaction].[ADDITWORK] > "", 1, 0),0)

36. Finally Characteristic of good management accounting information:
usable for decision-making
(this does not necesserily mean detailed