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Subject: Operations Mangement
Activity Resource Usage Model
Understanding cost behavior is basic in determining relevancy. When costs were primarily unit- based, a simple distinction between fixed and variable costs could be made. The activity resourceusage model can help us sort out the behavior of various activity costs and assess their relevance.The activity resource usage model has two resource categories:
Resource spending is the cost of acquiring activity capacity. The amount paid for the supply of anactivity is the activity cost. For flexible resources, the activity resources demanded (used) equal theresources supplied. Thus, for this resource category, if the demand for an activity changes acrossalternatives, then resource spending will change and the cost of the activity is relevant to thedecision. For example, electricity supplied internally uses fuel for the generator. Fuel is a flexibleresource. Now, consider the following two alternatives: (1) accept a special, one-time order and (2)reject the special order. If accepting the order increases the demand for kilowatt-
activity driver), then the cost of power will differ across alternatives by the increase in fuelconsumption (assuming fuel is the only resource acquired as needed). Therefore, power cost isrelevant to the decision.
Committed resources are acquired in advance of usage through implicit contracting, and they are
usually acquired in lumpy amounts. Consider an organization’s salaried and hourly employees. The
implicit understanding is that the organization will maintain employment levels even though theremay be temporary downturns in the amount of an activity used. This means that an activity may have unused capacity available. Thus, an increase in demand for an activity across alternatives may not mean that the activity cost will increase.For example, assume that a company has five manufacturing engineers who supply a capacity of 10,000 engineering hours per year (2,000 hours by each engineer), and that the cost of this activity