CHAPTER 5
87
This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. This may not beresold, copied, or distributed without the prior consent
of the publisher.
Activity-Based Management andActivity-Based Costing
Questions
1. Activity-based management is amanagement approach that associatesthe activities executed by an organizationwith the value customers derive fromproducts. Efficiency and effectiveness areachieved by reducing the level of activitiesthat do not create value for the customerand by improving execution of activitiesthat do create customer value.Specific tools beneath the ABM umbrellainclude activity analysis, cost driveranalysis, activity-based costing,continuous improvement, operationalcontrol, performance evaluation, andbusiness process reengineering.2. Value-added activities are viewed from thecustomer's perspective because it is thecustomer who is the end evaluator of the“worth” of a product or service and,therefore, the activities involved in creatingthat product or service.3. In a televised football game, the value-added activities are the actual game plays.Non-value-added activities consist ofcommercials and the time between plays.Activities such as “moving the chains,”measuring to determine if a first down wasmade, moving the ball from the end of oneplay to the point where it will be put in playnext are all non-value-added activities.People who believe that the commercialsare informative and interesting and thatthe time between plays allows them anopportunity to examine the strategies ofthe teams and project what each team islikely to do play may disagree with thisassessment.4. Yes, cost drivers exist in traditionalaccounting systems although they arecalled "bases for allocation."In traditional systems, a single cost driversuch as direct labor hours or machinehours is commonly used rather thanmultiple cost drivers. Also in traditionalsystems, volume-based cost drivers aremore the norm than non-volume-based(e.g., square footage) cost drivers.Finally, traditional accounting stressesfinding an allocation base thatdemonstrates strong statistical correlationto the cost, but ABC emphasizessearching for multiple cost drivers thatbear cause-and-effect relationships to thecost.5. Activity analysis is used to separateactivities into two groups: those that addvalue to the product or service and thosethat do not add value. Once the non-value-adding activities are identified,managers seek to reduce or eliminate thelevel of the drivers of those activities. Ifsuch efforts are successful, non-value-adding costs will be reduced withoutimpairing the value of products or servicesto the consumer. The result should be anincrease in profits.6. By using a single cost pool and a singlecost driver to allocate overhead, the moretraditional methods of overheadassignment ignore the influence on cost ofthe different activities that occur to make aproduct. In this manner, low-volumespecialty products, which cause adisproportionate amount of overhead, areonly assigned an average charge foroverhead, thereby shifting costs to thestandard product lines. ABC does a better job of tracing costs to the products thatcaused the various costs by using multiplecost pools and multiple cost drivers.7. All companies are not likely to benefitequally from adopting ABC. The greatestbenefits are likely to be gained by firms
Leave a Comment