1. Activity Based Costing
SHOW SLIDE 1: Activity Based Costing
SECTION I.
Activity Based Costing
ADMINISTRATIVE DATA
All Courses Including This Lesson
Course Number Version Course Title
01 Planning Programming Budget & Execution Course (PPBE)
Academic Hours
The academic hours required to teach this lesson are as follows:
Resident
Academic Hours/Method
0.1 hrs Introduction
2..2 hrs Large Group Instruction
0.6 hrs Practical Exercise
0.7 Summary
3.0 min Conference/Discussion
Test Lesson Number
Testing(to include test review)
Hours -0 hrs
Lesson Number -
Prerequisite Lesson(s)
Lesson Number
Lesson Title
Clearance Access
Security Level: Unclassified
Requirements: There are no clearance or access requirements for the lesson.
Foreign Disclosure Restrictions
FD5. This product/publication has been reviewed by the product developers in coordination with the Fort Jackson Soldier Support Institute foreign disclosure authority. This product is releasable to students from all requesting foreign countries without restrictions.
Instructor Requirements
Must meet physical qualifications IAW AR
Materials Required
Instructor Materials:
Lesson plan slides, DFAS-IN Regulation 37-1, DFAS-IN-MANUAL FY, Instructor copy 
Student Materials:
Activity Based Costing, Practical Exercise #1 and #2, calculator and pencils.
Classroom, Training Area, and Range Requirements
General Purpose Classroom - 25 Seats
Instructional Guidance
Note: Before presenting this lesson, instructors must thoroughly prepare by studying this lesson and identified reference material.
Also, provide the students with situational awareness of the Operational Environment (OE) variables and actors.
Proponent Lesson Plan Approvals
Name Rank Position Date
Harris, Norman CTR Writer/Developer xx-xxx-xxxx
Bonig, Reid GS-12 Chief - FMITD xx-xxx-xxxx
Davis, Bobby LTC FM-DOT xx-xxx-xxxx
Zellars, Eric COL Commandant xx-xxx-xxxx
Show Slide 2
NOTE: Incorporate the political, military, economic, social, information, infrastructure, and physical environment and time (PMESII&PT) into each lesson and classroom work as appropriate. Instructor will illustrate them with appropriate examples from the Current Operating Environment (COE) as it pertains to the lesson.
Motivator: As a resource manager, it is important to know where and how your organization fits into Planning, Programming, Budgeting and Execution process.
To succeed, you must know the DoD, DA, and ASA(FM&C) organization structures. Knowledge of these structures will enhance your understanding of how resources are allocated and how resource management structures influence or facilitate resource allocation.
Military commanders have always been concerned with cost (at least the good ones were). However, they looked at cost in terms of men and equipment. Today’s commanders must also consider cost in terms of resources, or more precisely, dollars.
Reduced resources mean that management of resources is more important. The capability to measure cost is a prerequisite to cost management. When working budgets you want to track the resources that are consumed to the activities being performed that provide a product or service. The question you’re trying to answer is what or who is causing me to utilize and consume my resources.
Traditionally cost accountants have arbitrarily added a broad percentage of expenses onto the direct costs to allow for the indirect costs. However, as the percentages of indirect or overhead costs have risen, this technique became increasingly inaccurate because the indirect costs were not caused equally by all the products.
Traditional costing systems are often unable to determine accurately the actual costs of production and of the costs of related services. Consequently managers were making decisions based on inaccurate data, especially where there are multiple products.
The concepts of ABC were developed in the manufacturing sector during the 1970s and 80s. Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.
We use ABC as a cost measurement tool to help understand costs and make informed decisions on funding programs and activities.

2. Terminal Learning Objective
Action:
Conditions:
Standard:
Conduct Activity Based Costing (ABC)
Given a summary sheet containing DFAS-IN Manual , DFAS-IN Reg 37-1, and slides.
With 80% Accuracy:
Administer an Activity Based Costing (ABC) analysis; and integrate cost allocation.
SHOW SLIDE 2: Terminal Learning Objective
SAFETY REQUIREMENTS. In a training environment, leaders must perform a risk assessment in accordance with FM 5-19, Composite Risk Management. Leaders will complete a DA Form 7566 COMPOSITE RISK MANAGEMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations, (METT-TC). Note: During MOPP training, leaders must ensure personnel are monitored for potential heat injury. Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the MOPP work/rest cycles and water replacement guidelines IAW FM , NBC Protection, FM , CBRN Decontamination.
No food or drink is allowed near or around electrical equipment (CPU, file servers, printers, projectors, etc.) due to possible electrical shock or damage to equipment.  Exercise care in personal movement in and through such areas.  Avoid all electrical cords and associated wiring.  In event of electrical storm, you will be instructed to power down equipment. Everyone is responsible for safety.
RISK ASSESSMENT LEVEL. Low.
ENVIRONMENTAL CONSIDERATIONS: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM Environmental Considerations and GTA ENVIRONMENTAL-RELATED RISK ASSESSMENT.
EVALUATION. You will be given an exam which will cover Activity Based Costing. A passing score on this examination is 80% and for International Students (70%).
INSTRUCTIONAL LEAD-IN. Your responsibility is for understanding Activity Based Costing. Activity Based Costing is a method to allocate cost to different processes both in the private sector and in the government.
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3. FINANCIAL MANAGEMENT SCHOOL
Introduction
Inability to Manage Cost Well Will Result In Excessive Loss of Combat Capability
SHOW SLIDE 3: Introduction
Concrete Experience (05 minutes)
The concrete experience serves as a trigger of past experience, knowledge, and it is also a focusing mechanism for the lesson that follows to support the teaching of new content. The collective intent is to force the student to connect to the lesson and is the precursor to intuitive thinking of experiential learning model.
Concrete experience:
Q. What was going on during the 80s that caused bad habits in spending for Defense?
Cold War.
Q. What was President Reagan trying to do, and what was his objective?
A. Nuclear Arms Race trying to outspend the Soviets and collapse their economy.
Q. Did it work? What happened on November 1989?
Fall of the Berlin Wall.
Q. Besides the Gulf War, what else happened in 1991?
A. The Soviet Union collapsed. December 8, 1991 the Commonwealth of Independent States was formed out of what used to be the Soviet Union. So, President Reagan did indeed achieve his objective although it happened after his Presidency.
In the 1990’s, we moved out of the Cold War mentality. The resources that were relatively plentiful during the Cold War years under President Reagan were no longer so readily available.
After 9/11, the military again was operating with relatively unlimited resources. However, as GWOT /OCO continues, the public has become war weary and Congress has begun scrutinizing defense budgets. In order to maximize resources we need to have an understanding of what things cost in order to reduce cost and find ways to execute our missions more efficiently. Otherwise, we are poised to lose funds, which will result in a loss of combat capability. Managing costs will become much more important for next couple years. Mr. Stephen G. Barth, the Deputy Assistant Secretary of the Army for Cost Analysis (also heads up the United States Army Cost and Economic Analysis Center) is pushing a Cost Culture from the top Army leadership down to the lowest levels to make us focus more on the money we are spending and gaining efficiencies where possible.
Discuss the bridge between the question and lesson to help the students understand the importance of relating past experience to current situations.
Instructor Note: To open the discussion canvas the class to see how many have deployed. Find out what they did on the deployment.
Publish and Process (15 Minutes)
During this phase of the Army Learning Model the instructor will solicit responses of the student’s reaction to the concrete experience. The students will reflect on their experience and knowledge of the topic and they will begin a reconciliation of where they are and, if successful, where they will be at lesson end.
The critical portion of this part of the ALM process is to force the students to reflect. As the instructor you can achieve this by asking a series of thought influencing questions, for example:
What happened in the video/skit/slide and how could it relate to this lesson?
How did it make you feel about the personal responsibility that must be taken to mitigate causing undue hardship to Soldier’s and their Family’s?
What did you hear/see that makes you relate it to your own experiences?
What was your reaction to the magnitude of miscues?
Having the students think critically is the ultimate goal of publish and process. Force the students to explain their answers; meaning, how and why did they arrive at the solution to the questions.
As the instructor, you should also be looking for responses that will help the student’s transition from publish and process to generalize new information. During this process, remind the students of lesson objectives as they transition from publish and process into generalize new information.
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4. Consider the Alternatives to
Meet a 10% Budget Cut
Ineffective: Cut 10% of the Budget Spent on Oil and Lubricants
Eliminate Combat Effectiveness
Mindless: Salami Slice All 10%
Reduce Combat Effectiveness 10%?????
Rational: Manage Cost Smarter
Maintain or Increase Combat Effectiveness
SHOW SLIDE 4: Consider the Alternatives to Meet a 10% Budget Cut
The question is not whether the budget cuts are coming but how to deal with them. This slide shows a few of the common ways the Army addresses budget cuts.
The first alternative is to cut the budget for oil and lubricants by 10%. This would be rather ineffective because you’ll end up with all your vehicles parked in the motorpool for the last quarter of the fiscal year.
The second alternative is to execute a 10% across the board cut to all units and activities. The problem is, who’s worse off , the unit that has a 10% cut of a $1 million budget or the unit that loses 10% of a $100,000 budget. There really isn’t any way of knowing unless you know what you’re cutting.
The preferred way to deal with a 10% cut would be to improve productivity by 10%. Therefore, the third alternative is manage your costs smarter. If you can identify what your costs are, then maybe you can find efficiencies that will save money and you can alleviate some of the pain of the 10% cut.
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5. Chief Financial Officers Act
Billions Of Dollars Lost Each Year Through ... Mismanagement
Losses Could Be Significantly Decreased By Improved Management
Great Need Of Fundamental Reform In Financial Management
Current Practices Do Not Provide Timely Information Required For Efficient Management
SHOW SLIDE 5: Chief Financial Officers Act of 1990
Look at these statements from the Findings Paragraph of the Chief Financial Officers Act of 1990:
Billions Of Dollars Lost Each Year Through ... Mismanagement
Losses Could Be Significantly Decreased By Improved Management
Great Need Of Fundamental Reform In Financial Management
Current Practices Do Not Provide Timely Information Required For Efficient Management
In this Act:
- Congress requires federal agencies to name a Chief Financial Officer to promote financial management and to develop the information needed for better financial management. Congress’s focus on management is obvious.
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6. Cost Management Requires
Cost Measurement
Management Must Have Cost Measurement to Fight Cost War
Cost Measurement
Informs Management of Financial Implications of Management Decisions
Is Prerequisite to Cost Reduction
Eliminates Free Goods
Facilitates Best Use of Limited Resources
SHOW SLIDE 6: Cost Management Requires Cost Measurement
Cost measurement is an important strategy for fighting the cost war. Resource Managers must have an understanding of cost in order to make financially sound decisions. In addition, management can’t reduce costs without first knowing what things cost. Good cost measurement will eliminate free goods. It will also help managers make best use of limited resources by giving them a criteria (cost) for decision making.
You don’t want to be saying - “If I had known what this would really cost……”
Why have cost measurement and management?
- Cost Measurement informs Management of the Financial Implications of Management Decisions.
Cost measurement is a Prerequisite to Cost Reduction
It eliminates Free Goods
It Facilitates Best Use of Limited Resources
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7. Cost Information Enables Efficient Use of Resources
Which Metal is Best for Transmission?
Metal A
Metal B
Metal C
SHOW SLIDE 7: Cost Information Enables Efficient Use of Resources
Which should you choose?
Without cost information - choose Metal C for all power lines since it has the highest conductivity.
What if you know that Metal A is copper, Metal B is silver, and Metal C is gold?
Although gold has a higher conductivity, is it cost effective to use gold for all power lines?
If you Choose A (Copper Wire) - a certain amount of energy will be lost due to resistance in the copper wire.
However, the cost of the lost energy does not justify using the gold wire. Maybe you want to split the difference between quality and cost and choose silver. So cost information is necessary if you want to efficiently use your resources.
Conductivity
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8. ABC: a Self Made Tool for Managerial Cost Accounting
Seek To Understand True Economic Cost
Based on Cause-Effect Relationships
Reflecting Drivers of Resource Consumption
With Reasonable, But Not Precise Accuracy
Promote Better Resource Management
Eliminate Free Goods
Stimulate Behavioral Change
Enable Accountability for Cost Management
SHOW SLIDE 8: ABC: a Self Made Tool for Managerial Cost Accounting
The cost managing method the Army chose is ABC.
ABC has two goals:
The first goal is to help managers understand true cost. It does this by looking at the cause-effect relationships between cost drivers and resource consumption. It gives a true picture of cost with reasonable accuracy, while avoiding overly detailed precision.
The second goal is to promote better resource management. Understanding true cost promotes better resource management by eliminating free goods, and thereby stimulating desired behaviors.
Activity Based Costing also gives managers the basis for assigning accountability for cost management decisions.
Activity-Based Costing encourages managers to identify which activities are value-added—those that will best accomplish a mission, deliver a service, or meet a customer demand. It improves operational efficiency and enhances decision-making through better, more meaningful cost information.
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9. managerially useful information
A Broad Definition of
Managerial Costing
raw accounting data
managerial
costing
translation
managerially useful information
SHOW SLIDE 9: A Broad Definition of Managerial Costing
ABC is a tool used to conduct managerial costing. Managerial costing translates raw accounting data into managerial useful information.
Why is this translation important?
We want to know who or what is consuming our resources and charge them for it.
It also allows us to make decisions based on our accounting data.
Some examples of Raw Accounting Data is labor, overhead, materials, and supplies.
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10. Why is This Translation
Needed?
Accounting Systems Usually Measure Input or Source Costs
Labor, Overhead, Materials
Salaries, Benefits, Supplies, Contracts
Managers Want Measurements Based on Output or Consumption
Product, Service, Project
Consuming Organization, Customer
SHOW SLIDE 10: Why Is This Translation Needed?
The translation is needed because accounting systems measure input or source costs and managers need cost information based on output or consumption.
If your company produced 3 types of tires and one type of tire consumed a large amount of resources and the output/profit margin was low management would need this information to make future decisions.
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11. Managerial Costing Terms managerially useful information
raw accounting data
cost pool
managerial
costing
translation
method of
distribution =
SHOW SLIDE 11: Managerial Costing Terms
ABC Basic Premise
Cost objects consume activities
Activities consume resources
This consumption of resources is what drives costs
Understanding this relationship is critical to successfully managing overhead
In terms of ABC:
Raw accounting data = Cost pool
Managerially useful information = Cost object
Managerial costing translation = method of distribution
managerially useful information
cost object
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12. FINANCIAL MANAGEMENT SCHOOL
Terminology (1 of 4)
Cost Pool:
An Aggregation of Incurred or
Source Costs to be Distributed
Examples:
Salary and Benefits, Supplies, Travel, etc. in Airfield Operations Center
Utility Bills for Garrison
cost pool
SHOW SLIDE 12: Terminology (1 of 4)
Activity Cost Pool - A grouping of all cost elements associated with an activity.
An activity is a set of tasks, like provide police patrols, that would include cars, POL, officers, materials, etc.
Activity cost is the full cost of performing an activity.
In practice, organizations have many activities and have to combine activity costs into a few Cost Pools.
The pools are distributed to cost objects in proportion to cost drivers.
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13. FINANCIAL MANAGEMENT SCHOOL
Terminology (2 of 4)
Method of Distribution:
The Mechanics of Deriving Management Information from the Cost Pool
Example:
Determine Unit Cost By Adding All Input Costs and Dividing by Number of Units
method of
distribution
SHOW SLIDE 13: Terminology (2 of 4)
Method of Distribution is the mechanics of deriving management information from the cost pool.
It is how you divide up the costs.
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14. FINANCIAL MANAGEMENT SCHOOL
Terminology (3 of 4)
Cost Driver:
Good cost drivers distribute cost
based on cause and effect, reflecting
true cost consumption by a cost object
Examples:
Activity Cost Driver
Heating Square Footage
Personnel Training Hours
Accounting Reports requested
Activity Cost Pool
allocation
based on
cost driver
SHOW SLIDE 14: Terminology (3 of 4)
To divide up costs we use “cost drivers”.
Good cost drivers distribute cost based on cause and effect , reflecting true cost consumption by a cost object.
The measure of the use of a shared activity by each of the products is known as the cost driver. The Cost Driver is any activity that causes a cost to be incurred.
cost object
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15. FINANCIAL MANAGEMENT SCHOOL
Terminology (4 of 4)
Cost Object:
The product, service, or object that created the costs
Examples:
120mm Tube Product Cost
Morale, Welfare, Recreation Cost
Financial Management School
Cost
SHOW SLIDE 15: Terminology (4 of 4)
Cost Object is the product, service, or object that created the costs.
As in, what made the total costs?
Examples:
120mm tube cost is a product cost
MWR and Financial Management School costs are service costs
A cost object is a tangible input for a product manufactured, or service provided, like labor or material.
For example, a cloth manufacturing firm requires some amount of predetermined labor and predetermined raw material for any amount of cloth being manufactured. The cost of employing labor can be directly fixed as “per man, per day”, so the labor is a cost object as you can directly associate cost with it.
Similarly, the raw material like cotton or threads or fabric can be another cost object.
Other examples may include services taken by another firm, for example a transportation company or service can be a cost object.
Generally, the cost object term is used for fixed cost components of total cost. Otherwise, anything which is incurring some cost can be called a cost object, like an Advertisement.
cost object
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16. Alternative Methods of
Distribution
Managers Can Obtain the Needed View of Cost in Several Ways
Guessing: Gut Feel of Cost Distribution
Direct Costing: Detailed Record Keeping of all Incurred Cost Transactions by Every Cost Object
Allocation: Distribution of Cost Pool in the Same Proportion as a Cost Driver
SHOW SLIDE 16: Alternative Methods of Distribution
Remember those Cost drivers…
Now that we have looked at the terminology lets go back and look at methods of cost distribution.
Lets use the example of heating costs for buildings:
We could guess how much cost to distribute to each building. (Not accurate)
We could apply direct costing by keeping detailed records on the heating cost for each building (separate meters). ( Costly)
We could distribute heating cost based on the cost driver of square footage. (Best)
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17. FINANCIAL MANAGEMENT SCHOOL
Most Systems Combine
Methods
cost pool
detailed
record
keeping
allocation
based on
cost driver
SHOW SLIDE 17: Most Systems Combine Methods
Most systems of cost distribution combine methods.
You want to allocate based on a cost driver but you want to make sure that people are really paying what they should and not punishing those that aren’t
Some offices are larger and tend to always be cold, while other small offices will be like a sauna.
Should you make the larger office pay for the smaller ones heat?
cost object
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18. FINANCIAL MANAGEMENT SCHOOL
Choosing a Method of
Distribution
Use Guessing for Simple Decision Making
Keep Detailed Records When Accounting Cost is Low and High Accuracy Useful
Allocate Overhead, Support, and Indirect Costs When Appropriate
Consider Management’s Needs for Precision and Timeliness
SHOW SLIDE 18: Choosing a Method of Distribution
When determining the best method of distribution guessing is good for simple decision making but not very accurate.
Direct costing involves keeping detailed records and is extremely accurate but costs can be high for this method.
Allocation is good for overhead, support, and indirect costs but make sure a good cost driver is selected.
The best method depends on whether exact precision or timeliness is more important in your organization.
We will work a PE in this area later.
Let’s decide which method for the example on the next slide?
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19. FINANCIAL MANAGEMENT SCHOOL
Discussion:
Telephone Charges
Should These be Allocated or Charged Via Detailed, Call-by-Call Records
Issues to Consider
What Does Management Need?
Is Telephoning a Core Mission or Support Function?
Are Detailed Records Available?
SHOW SLIDE 19: Discussion: Telephone Charges
Ask the students what they think. You’ve got four offices and each have a phone.
Should telephone charges be allocated evenly or charged via detailed records, call-by-call? It depends….
If telephone charges are extremely important to management and a high cost area for the company, then probably detailed record keeping would be best to distribute cost.
If telephone charges are low and not very important to management, allocation would be best.
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20. Two Allocation Methods
Rate Method:
Uses a Computed Rate per Driver Unit
Proportion Method:
Computes a Proportional Share of the Total Cost Based on Driver Usage
SHOW SLIDE 20: Two Allocation Methods
The two allocation methods are rate and proportion.
They both yield the same results and represent the same underlying algebra.
Lets take a look at the formulas for both and an example.
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21. Reconciling the Two Methods
Rate
Method
Total Cost Pool
Total Number of Driver Units
Equals
SHOW SLIDE 21: Reconciling the Two Methods
This is the example we will follow for the next couple of slides.
Example: (Write on Board)
4 people went out for dinner.
The total cost of the bill was $
The cost pool was the dinner check.
The cost objects were the four people who ate dinner.
The cost driver was the eaters.
Using the rate method the total cost pool was $ and the total number of driver units is 4.
4 divided by 160 is a rate of $40.00 per eater.
Using the proportion method, number of driver units used is 1 and the total number of drivers is divided by 4 is .25 or 25%. The proportion each will pay is 25% of the total cost pool.
2 Methods giving the same result
Proportion
Method
Number of Driver Units Used
Total Number of Driver Units
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22. FINANCIAL MANAGEMENT SCHOOL
Split the Dinner Check
Saluda’s
Fillet and Lobster
Chicken Kiev
Top Sirloin
Caesar Salad
Coffee
House Wine
Champagne
Ice Cream
Chocolate Cheesecake
Sampler
Soup/Salad
Aperitif
Total $160.00
Carol
Alice
SHOW SLIDE 22: Split the Dinner Check
We will continue to look at this example using snap shots of an excel spreadsheet.
Bob, Ted, Carol and Alice went out to dinner and decided to split the dinner check of $
Thank You
Bob
Ted
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23. Allocation by Proportion
1. Determine Proportion of Consumption
Usage by Cost Object ÷
Total
diners = %
Bob 1 4
25%
Ted
Carol
Alice
100%
2. Multiply Proportion by Total Cost
Cost Object % x
dinner check
Allocation
160 40 $
SHOW SLIDE 23: Allocation by Proportion
Lets use the Proportion Method to determine how much of the dinner check will be allocated to each person or cost object.
We said the formula was:
Number of Driver Units Used / Total Number of Driver Units
Number of driver units used is 1 and the total number of drivers is 4
1 / 4 = 25%
$160 * 25% = $40.00 / cost object or person
We allocate $40 to each person
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24. Allocation by Rate Method
1. Determine Overhead Rate:
Total Cost ÷
Total
diners =
Rate per
diner $
160 ÷ 4 = $ 40
2. Compute Allocation:
Usage by Cost Object x
Rate =
Allocation
SHOW SLIDE 24: Allocation by Rate Method
Lets use the Rate Method to determine how much of the dinner check will be allocated to each person or cost object:
We said the formula was:
Total Cost Pool / Total Number of Driver Units
The total cost pool was $ and the total number of driver units is 4
$160 / 4 = $40
We allocate $40 to each person
Bob 1 x $ 40 = $ 40
Ted 1 x $ 40 = $ 40
Carol 1 x $ 40 = $ 40
Alice 1 x $ 40 = $ 40
Total $
160
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25. FINANCIAL MANAGEMENT SCHOOL
The Results
Cost Allocation for dinner check based on diners
$40
$30
Bob
Ted
$20
Carol
SHOW SLIDE 25: The Results
The results are each person will be allocated cost at $40.00 per person using the proportion or rate method .
Could we have cross subsidization occurring here?
i.e. - Someone getting over? (Next slide)
Alice
$10
Print $-
Reset
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26. FINANCIAL MANAGEMENT SCHOOL
Cross Subsidization
Is This Fair?
SHOW SLIDE 26: Cross Subsidization
Is there cross subsidization occurring if everyone ordered something at different costs.
Bob ordered lobster at $60.00 and Alice ordered a large salad at $15.00.
They both will be allocated $ Is this fair?
Consumption Cost allocation
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27. What Happens if Bob Spends $10 More?
Incremental Effects
What Happens if Bob Spends $10 More? 90 80 70 60
Original 50 40
Incremental
Change
SHOW SLIDE 27: Incremental Effects What Happens if Bob Spends $10 More?
Bob decides he wants a bottle of wine with his lobster.
He decides to spend 10 dollars for a bottle of wine.
The dinner check is now $
Everyone will now pay $42.50.
Bob just pays $2.50 more even though he consumed $10 dollars more.
Getting over? 30 20 10
Bob Consumes
Bob Pays
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28. What Happens if Bob Spends $10 Less?
Incremental Effects
What Happens if Bob Spends $10 Less? 80 70 60
Incremental
Savings 50 40
Decreased
Amount 30
SHOW SLIDE 28: Incremental Effects What Happens if Bob Spends $10 Less?
Bob decides he wants chicken instead of lobster.
Chicken is 10 dollars less than lobster.
The dinner check is now $
Everyone will now pay $37.50.
Still getting over? Alice still had a salad for $15.00 20 10
Bob Consumes
Bob Pays
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29. FINANCIAL MANAGEMENT SCHOOL
Measurement Affects
Motivation
Managerial Costing Inevitably Impacts Behavior
Design of Managerial Costing Systems Must Recognize and Anticipate This Effect
Consider in this Example
What Incentives Exist to Spend More?
What Incentives Exist to Spend Less?
What Would You Do if You Went to Dinner with Them Tonight?
SHOW SLIDE 29: Measurement Affects Motivation
Managerial costing does impact the behavior of all activities involved.
When you design a managerial costing system you must anticipate the effect it will have.
If you check every phone call made and then charge people for calls - it will change their calling behavior.
Your managerial costing system must recognize this effect.
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30. FINANCIAL MANAGEMENT SCHOOL
Conclusion
Allocation Based on Number of Diners Failed to Reflect Resource Consumption
Results:
Unfair Cross-Subsidizations
The Creation of Almost Free Incremental Goods
Dysfunctional Behavioral Motivation
Detailed Record Keeping May be Best in This Problem -- i.e. Separate Checks
SHOW SLIDE 30: Conclusion
Looking at our example of the 4 people/cost objects that went out for dinner it failed to reflect resource consumption by cost object.
So, it resulted in an unfair split of costs,
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31. Check On Learning Q. What is the definition of Managerial Costing?
Slide 24
3131

32. Terminal Learning Objective
Conduct Activity Based Costing (ABC).
Given a summary sheet containing DFAS-IN Manual , DFAS-IN Reg 37-1, and slides.
With 80% Accuracy:
Administer an Activity Based Costing (ABC) analysis; and integrate cost allocation.
Action:
Conditions:
Standard:
SHOW SLIDE 31: Terminal Learning Objective
The objective of activity-based costing is to understand overhead and the profitability of products and customers.
ABC is a cost measurement tool used by the Army to help local managers understand their costs and make informed decisions.
ABC traces the resources that are consumed to the activities being performed to provide a product or service.
Do PE!!!
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