Activity-Based Costing PDF

2.2 Activity-Based Costing ACTIVITY-BASED COSTING: A methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, and then activities are assigned to cost objects based on their use. ABC recognizes the causal relationships of c...

2.2 Activity-Based Costing ACTIVITY-BASED COSTING: A methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, and then activities are assigned to cost objects based on their use. ABC recognizes the causal relationships of cost drivers to activities. ABC also adopts an attention- focusing, long-term, resource consumption orientation. ACTIVITY-BASED COSTING VS. REFERENCES: Emblemsvåg, J. (2003). Life- VOLUME-BASED COSTING Cycle Costing: Using Activity-Based Costing and Monte Carlo Methods to Manage Future Costs and Risks. Data images: https://www.pngkit.com/; (https://www.pngkit.com/;) https://www.123rf.com/ (https://www.kindpng.com/)  REFERENCE: Emblemsvåg, J. (2003). Life-Cycle Costing: Using Activity-Based Costing and Monte COST-REDUCTION OPPORTUNITIES Carlo Methods to Manage Future Costs and Risks. ACTIVITY REDUCTION: Activity reduction is one of the key elements in continuous improvement. This implies that the elapsed time and effort required to perform activities must be reduced. ACTIVITY ELIMINATION: Activity elimination is based on the fact that changes in the production process or products can eliminate the need to perform certain activities. Many activities in an organization do not contribute to customer value, responsiveness, or quality (nonvalue-added activities). ACTIVITY SELECTION: Activity selection is applicable when a product or a production process can be designed in several ways, with each alternative carrying its own set of activities and costs. ACTIVITY SHARING: Activity sharing provides economies of scale as the designer of a product or process can choose design alternatives that permit products to share activities. REFERENCES: Emblemsvåg, J. (2003). Life- Cycle Costing: Using Activity-Based Costing and Monte Carlo Methods to Manage Future Costs ACTIVITY-BASED LIFE-CYCLE and Risks. COSTING Data images: https://www.bing.com; https://www.istockphoto.com (https://www.bing.com) DEFINE THE SCOPE OF THE MODEL AND THE CORRESPONDING COST OBJECTS: The scope should include as a minimum the objectives of the model, its system boundaries, and its perspective. OBTAIN AND CLEAN BILL OF MATERIALS FOR ALL COST OBJECTS: It is important that the BOM does not contain any overhead costs that are not volume related in order to reduce possible distortions to a minimum. IDENTIFY AND QUANTIFY THE RESOURCES: The objectives may include a complete life cycle, a decade, or another time frame, but the point is that we must include the relevant costs given the appropriate perspective. CREATE AN ACTIVITY HIERARCHY AND NETWORK: Every process within the system boundary is broken down into more and more detailed processes (activities), and thereby an activity hierarchy is created. The activities should be defined in enough detail to get reliable information. IDENTIFY AND QUANTIFY RESOURCE AND ACTIVITY DRIVERS: The purpose of resource drivers is to trace how the activities consume resources, while activity drivers are to trace how the cost objects consume activities. IDENTIFY THE RELATIONSHIPS BETWEEN ACTIVITY DRIVERS AND DESIGN CHANGES: We need to distinguish between two different design approaches. The simplest is when we want to select from several options. Here no relationships are needed since we are not interested in changing the design, only selecting. MODEL THE UNCERTAINTY: What is important to emphasize is that Monte Carlo methods, or simulation techniques, enable the most versatile handling of uncertainty. ESTIMATE THE BILL OF ACTIVITIES: To estimate the cost of an activity, the resource driver is multiplied by its consumption intensity. This is done for all the activities and then is summed up to produce the total cost of all the activities, which is the Bill of Activities (BOA). ESTIMATE THE COST OF COST OBJECTS ANF THEIR PERFORMANCE MEASURES: In Step 8 resources are traced to activities, whereas in this step activity costs are traced to cost objects. From this, it is evident that Step 8 is the first step in an ABC system, whereas Step 9 is the second step. PERFORM MONTE CARLO SIMULATIONS AND RELEVANT ANALYSES: Discuss some important engineering analyses that may greatly affect life-cycle costs and how to decide whether we should iterate the model implementation or not. REFERENCES: Emblemsvåg, J. (2003). Life- Cycle Costing: Using Activity-Based Costing and Monte Carlo Methods to Manage Future Costs and Risks. Data images: https://career.uconn.edu; https://www.clipartkey.com (https://career.uconn.edu)