Management Level Paper P2 Advanced Managemen t Accounting Lecture 02 Vidya Rajawasam ACMA CGMA MBA ABC amp ABM In the previous Lecture we will discuss ID: 805176
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Activity Based Costing and (ABC) Activity Based Management (ABM)
Management Level – Paper P2Advanced Management Accounting
Lecture - 02
Vidya
Rajawasam
ACMA CGMA MBA
Slide2ABC & ABM
In the previous Lecture we will discuss Activity Based Costing Activity Based Management
ABC & ABM
In this Lecture we will discuss Implementation Problems with regard to ABC & ABM Product/Customer/Distribution channel profitability
ABC & ABM
Problems with implementation of ABC/ABM Although many academics, researchers and management theorists discuss about the ABC/ABM principles, the implementation of the same has met with some difficulties.
Slide5ABC & ABM
Problems with implementation of ABC/ABM Some of the difficulties are; General ledger financial information systems are too poor to provide reliable ABC information. The resulting figures are similar to traditional absorption costing methods.
ABC & ABM
Problems with implementation of ABC/ABM Some of the difficulties are; Lack of effort, dynamism among finance department staff to implement the ABC systems. Examples, difficulties in identification of more than
50 activities and costs attributed to them.
Slide7ABC & ABM
Problems with implementation of ABC/ABM Some of the difficulties are; Finance department staff unable to perceive the needs of the production staff. Some of the production procedures, processes, activities are complicated and difficult to interpret in accounting terms.
ABC & ABM
Tips for implementation of ABC/ABM Obtain the support of the senior management.Recognize that the ABC/ABM requires a major investment related to time and resources.
ABC & ABM
Tips for implementation of ABC/ABM Be clear about what ABC/ABM can achieve and what information is required from the system.
Choose the model approach that emphasizes the operational understanding of all activities of the business.
ABC & ABM
Tips for implementation of ABC/ABM Involve people in the field, operations, technical staff etc…Transfer ownership of cost management from the
accounts department to departments that are responsible for carrying out operations/processes, where the costs are incurred.
ABC & ABM
Tips for implementation of ABC/ABM Do not underestimate the need to manage the change process. Link ABC/ABM to corporate objectives in the form of increased product profitability
and added customer value.
Slide12ABC & ABM
Direct Product Profitability (DPP) DPP is used primarily in the retail industry. The traditional absorption costing generally uses labour hours as a basis for absorption of overheads and the method is
rarely suitable for service and retail organizations.
ABC & ABM
Direct Product Profitability (DPP) DPP involves the attribution of purchase cost and other indirect costs to each product line. Thus a net profit can be identified for each product as opposed to a gross profit.
ABC & ABM
Direct Product Profitability (DPP) Therefore, It is important to understand that the cost attribution process utilizes variety of methods to reflect the resource consumption of individual products.
ABC & ABM
Direct Product Profitability (DPP) The retail organizations traditionally use selling price less cost of bought in goods to calculate gross margins. The gross margin calculation is a
useless measure in controlling costs. This calculation does not involve other indirect costs associated with the retail operation.
Slide16ABC & ABM
Direct Product Profitability (DPP) Indirect costs related to retail operations are; storage costs, transport costs , warehouse costs, distribution costs. Warehouse costs include the
labour, space occupied and insurance costs. Transport costs include, labour, fuel, vehicle maintenance costs.
Slide17ABC & ABM
Direct Product Profitability (DPP) The traditional method is to spread these indirect costs across the different goods sold in relation to the volume of goods sold or area occupied. However, we can argue that it is better to spread insurance
costs according to the value or risk profile of the goods.
Slide18ABC & ABM
Direct Product Profitability (DPP) When arriving at DPP, bought in cost of goods and the indirect costs will be taken. Therefore, we can clearly observe the importance of DPP and ABC systems in
identifying the costs and making strategic decisions regarding the product profitability.
Slide19ABC & ABM
Direct Product Profitability (DPP) In 1985, the Food Marketing Institute in USA laid down the DPP as the standard approach. After 2 years, DPP was taken up by the
Institute of Grocery Distribution in UK. The method has transformed over years with the development of ABC.
ABC & ABM
Direct Product Profitability (DPP) Benefits Provides better cost analysis Better pricing decisions can be taken
Better management of store and warehouse space.
Slide21ABC & ABM
Direct Product Profitability (DPP) Benefits Better Merchandising decisions Better rationalization of product ranges.
Slide22Review MCQs
The benefits of Direct Product Profitability are? Provides better cost analysis Provides in depth understanding of direct labour costs. Supports traditional absorption costing. Supports better pricing decisions
ABC & ABM
Slide23Review MCQs
The benefits of Direct Product Profitability are? Provides better cost analysis Provides in depth understanding of direct labour costs. Supports traditional absorption costing. Supports better pricing decisions
ABC & ABM
Slide24Review MCQs
The implementation problems of Activity Based Costing systems are? General ledger information too poor to provide reliable information for ABC Difficulties in perceiving the needs of the production staff. Too costly to implement Does not require additional resources.
Competitor Analysis
Slide25Review MCQs
The implementation problems of Activity Based Costing systems are? General ledger information too poor to provide reliable information for ABC Difficulties in perceiving the needs of the production staff. Too costly to implement Does not require additional resources.
Competitor Analysis
Slide26ABC & ABM
Customer Profitability Analysis Many organizations have realized the importance of customer profitability analysis. This is a new technique made possible through ABC, which identify the customer profitability to through cost pools and activities.
ABC & ABM
Customer Profitability Analysis Different customers have different profitability contribution levels. Some customers use certain activities only and all customers will not use all related the activities. Basically, the customers
have different activity profiles.
Slide28ABC & ABM
Customer Profitability Analysis Definition, the analysis of revenue streams and service costs associated with specific customers or customer groups. The method
is useful for service organizations such as Banks , hotels etc..
Slide29ABC & ABM
Customer Profitability Analysis Example of customer service activities for a bank; Depositing of cash Withdrawal of cash Unauthorized overdraft Request
for a statementReturning a cheque due to insufficient funds
Slide30ABC & ABM
Customer Profitability Analysis Out of the facilities indicated for a bank, some customers will only request certain facilities and some customers may request all the facilities. The customers can be charged for the each different activity used and thus arriving at revenue from the
customer.
Slide31ABC & ABM
Customer Profitability Analysis Example of customer service activities for a Hotel; Well laid out gardens Swimming pool Restaurant Bar
ABC & ABM
Customer Profitability Analysis Out of the services provided by the hotel, older guests and guests with families may use swimming pool and garden facilities. Business Guests may use bar or restaurant facilities . Based on the services provided for the guests, we can
calculate the profitability for each customer.
Slide33ABC & ABM
Customer Profitability Curve Manufacturing organizations can also benefit from costing their customers. All customers cannot be charged with similar charges.
Some customers may require additional transport facilities due to distance from the factory.
Slide34ABC & ABM
Customer Profitability Curve Some customers may have urgent production requirements. Some may require technical assistance from the factory after the delivery of products etc.. When organizations analyze their customer profitability, they can observe that
20% of the customers provide 80% of the profit.
Slide35ABC & ABM
Customer Profitability Curve This scenario is known as Pareto analysis. As per the analysis and the diagram 50% of the customers reduce the profitability generated by the other customers.
ABC & ABM
Customer Profitability Curve Some theorists argue that there is no point serving these customers. What is important is to make them profitable. Usually small volume/order customers become unprofitable due to high production batch costs.
ABC & ABM
Distribution Channel Profitability The distribution channel of an organization refers to a chain of businesses or intermediaries through which good/service channeled until it reaches the end customer.
This can include wholesalers, retailers, distributors and the internet .
Slide38ABC & ABM
Distribution Channel Profitability The customers will look for ease of access to its suppliers, continuous supply of products for their needs, reciprocal communication, prompt delivery, after sales support etc..
Therefore, the distribution channel which a firm selects is a critical driver of business profitability.
Slide39ABC & ABM
Distribution Channel Profitability It is important to be aware of channel costs similar to products costs and customer costs.
Different channels will have different profitability levels and ABC system supports this analysis through creating cost pools for channel activities.
Slide40ABC & ABM
Distribution Channel Profitability Therefore, by having a detail understanding of distribution channel activities and costs through ABC system, the firm can reduce the channel costs and improve the channel profitability
.
Slide41Review MCQs
What is the true statement related to customer profitability analysis ? Identifies the costs related to the activities performed for servicing each customer. Provides information related to discounts Provides information related to products.
Provides after sales service.
Competitor Analysis
Slide42Review MCQs
What is the true statement related to customer profitability analysis ? Identifies the costs related to the activities performed for servicing each customer. Provides information related to discounts Provides information related to products.
Provides after sales service.
Competitor Analysis
Slide43Review MCQs
What is true related to Distribution Channel Profitability?Supports decisions concerning marginal costing. Supports quality assurance programs . Identifies the activities and costs related to distribution channels.
Non of the above
Competitor Analysis
Slide44Review MCQs
What is true related to Distribution Channel Profitability?Supports decisions concerning marginal costing. Supports quality assurance programs . Identifies the activities and costs related to distribution channels.
Non of the above
Competitor Analysis
Slide45Competitive Advantage
Lecture Summary We have discussed the Implementation Problems with regard to ABC & ABM Product/Customer/Distribution channel profitability
Activity Based Costing and Activity Based Management
Management Level – Paper P2Advanced Management Accounting
Lecture - 02
Vidya
Rajawasam
ACMA CGMA MBA