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Activity Based Costing and (ABC) Activity Based Management (ABM) Activity Based Costing and (ABC) Activity Based Management (ABM)

Activity Based Costing and (ABC) Activity Based Management (ABM) - PowerPoint Presentation

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Activity Based Costing and (ABC) Activity Based Management (ABM) - PPT Presentation

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

abm abc amp profitability abc abm profitability amp costs customer analysis product customers dpp channel related distribution direct activities

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Slide1

Activity Based Costing and (ABC) Activity Based Management (ABM)

Management Level – Paper P2Advanced Management Accounting

Lecture - 02

Vidya

Rajawasam

ACMA CGMA MBA

Slide2

ABC & ABM

In the previous Lecture we will discuss Activity Based Costing Activity Based Management

Slide3

ABC & ABM

In this Lecture we will discuss Implementation Problems with regard to ABC & ABM Product/Customer/Distribution channel profitability

Slide4

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.

Slide5

ABC & 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.

Slide6

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.

Slide7

ABC & 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.

Slide8

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.

Slide9

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.

Slide10

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.

Slide11

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.

Slide12

ABC & 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.

Slide13

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.

Slide14

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.

Slide15

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.

Slide16

ABC & 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.

Slide17

ABC & 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.

Slide18

ABC & 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.

Slide19

ABC & 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.

Slide20

ABC & ABM

Direct Product Profitability (DPP) Benefits Provides better cost analysis Better pricing decisions can be taken

Better management of store and warehouse space.

Slide21

ABC & ABM

Direct Product Profitability (DPP) Benefits Better Merchandising decisions Better rationalization of product ranges.

Slide22

Review 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

Slide23

Review 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

Slide24

Review 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

Slide25

Review 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

Slide26

ABC & 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.

Slide27

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.

Slide28

ABC & 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..

Slide29

ABC & 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

Slide30

ABC & 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.

Slide31

ABC & ABM

Customer Profitability Analysis Example of customer service activities for a Hotel; Well laid out gardens Swimming pool Restaurant Bar

Slide32

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.

Slide33

ABC & 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.

Slide34

ABC & 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.

Slide35

ABC & 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.

Slide36

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.

Slide37

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 .

Slide38

ABC & 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.

Slide39

ABC & 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.

Slide40

ABC & 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

.

Slide41

Review 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

Slide42

Review 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

Slide43

Review 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

Slide44

Review 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

Slide45

Competitive Advantage

Lecture Summary We have discussed the Implementation Problems with regard to ABC & ABM Product/Customer/Distribution channel profitability

Slide46

Activity Based Costing and Activity Based Management

Management Level – Paper P2Advanced Management Accounting

Lecture - 02

Vidya

Rajawasam

ACMA CGMA MBA