1. Managerial Accounting: An Introduction To Concepts, Methods, And Uses
Chapter 3
Activity-Based Management
Maher, Stickney and Weil

2. Learning Objectives (Slide 1 of 2)
Identify strategic and operational uses of activity-based management.
Differentiate between traditional cost allocation methods and activity-based costing.
Understand the concept of activity-based costing.
Identify the steps in activity-based costing.

3. Learning Objectives (Slide 2 of 2)
Apply activity-based management and costing to marketing.
Use the cost hierarchy to organize cost information for decision making.
Distinguish between resources used and resources supplied, and measure unused resource capacity.
Explain the difficulties of implementing advanced cost-management systems.

4. Activity-based Costing and Management (ABCM) (Slide 1 of 5)
ABCM rests on this premise:
Products require activities
Activities consume resources

5. Activity-based Costing and Management (ABCM) (Slide 2 of 5)
To understand a product’s costs, one must:
Identify activities required to make the product
Identify resources used to provide for those activities
Figure the cost of those resources

6. Activity-based Costing and Management (ABCM) (Slide 3 of 5)
To be competitive, managers must know both:
Activities involved in making the goods or providing the services, and
The cost of those activities

7. Activity-based Costing and Management (ABCM) (Slide 4 of 5)
ABCM has 2 parts:
The costing part known as Activity-based Costing (ABC)
The management part known as Activity-Based management (ABM)

8. Activity-based Costing and Management (ABCM) (Slide 5 of 5)
ABC treats mostly indirect costs including:
Overhead costs related to the manufacture of a product or providing a service
Indirect costs of marketing a product
Indirect costs of managing a company

9. Strategic Use of ABCM
Managers use activity-based information in 2 ways:
To shift the mix of activities and products away from less profitable to more profitable operations
To help them become a low-cost producer or seller

10. Activity Analysis Involves 4 steps:
Chart activities used to complete the product or service
Classify activities as value-added or non-value-added
Eliminate non-value-added activities
Continuously improve & reevaluate efficiency of activities or replace them with more efficient activities

11. Cost Pools Cost pools are groups of costs
Three major types of cost pools:
Plant (traditional)
Department (traditional)
Activity center (activity-based costing)

12. Traditional Allocation Methods
Plantwide allocation
Uses the entire plant as a cost pool
Simple organizations with only a few departments and little variety in activities might use this method
Department allocation
Uses separate cost pools with different overhead allocation rates for each department

13. Activity-Based Costing
Activity-based costing (ABC)
Assigns costs first to activities
Then to products based on each product’s use of activities

14. Activity-Based Costing Methods
Requires the following steps:
1. Identify activities that consume resources and assign costs to those activities
2. Identify cost drivers associated with each activity
A cost driver is a factor that causes or “drives” an activity’s costs
3. Compute a cost rate for each cost driver
4. Assign costs to products

15. Cost Rates per Cost Driver Unit
Calculate predetermined cost rate for each cost driver as follows:
Predetermined = Estimated indirect cost
cost rate Est.volume of allocation base
Multiply predetermined cost driver rate times volume of cost drivers consumed

16. Cost Hierarchies Examples Activity Category Plant Mgmt & Depr Capacity
Customer
Product
Batch
Unit
Examples
Plant Mgmt & Depr
Mkt Research
Product Specs & Testing
Machine Setups
Direct Materials

17. Resources Used Vs. Resources Supplied
ABC estimates cost of resources used by an activity as:
Cost driver rate X cost driver volume
Cost of Resources supplied = amount spent on the activity
Difference between resources used and supplied is unused capacity

18. Dr. Donald R. Trippeer, CPA Colorado State University-Pueblo
If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:
Dr. Donald R. Trippeer, CPA
Colorado State University-Pueblo