Managerial Accounting by G. Norren Chap008
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  • This chapter introduces activity based costing (ABC) which is a tool that has been embraced by a wide variety of service, manufacturing , and non-profit organizations.
  • ABC is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. It is ordinarily used as a supplement to, rather than as a replacement for, the company’s usual costing system.  
  • “ Best practice” ABC differs from traditional cost accounting in five ways. The first is:  ABC assigns both manufacturing and nonmanufacturing costs to products. Traditional cost systems assign only manufacturing costs to products. For example, ABC systems can assign sales commissions, shipping costs, and warranty repair costs to specific products.
  •  ABC systems do not assign all manufacturing costs to products, while traditional cost systems do assign all manufacturing costs to products. This is because ABC only assigns a cost to a product if decisions concerning that product will cause changes in the cost.
  •  ABC uses more cost pools than traditional cost systems that often use a single plantwide overhead pool or just one overhead pool per department. ABC cost pools are created to correspond to the activities performed in an organization that cause the consumption of overhead resources. The total number of ABC cost pools will definitely exceed one (as in the plantwide approach) and it is likely to exceed the number of departments within a company (as in the departmental approach) since more than one activity is often performed within each department.
  •  ABC uses more allocation bases than traditional cost systems which rely solely on volume as the base for allocating overhead costs.
  • The most common allocation bases in traditional cost systems are direct labor hours and machine hours. These bases work correctly when changes in the quantity of the base are correlated with changes in the overhead costs being assigned using the base.
  • Relying exclusively on volume measures such as direct labor hours or machine hours to assign overhead costs to products has come under increased scrutiny since, on an economywide basis, direct labor and overhead costs have been moving in opposite directions and the variety of products produced by companies has increased.
  • ABC systems often use direct labor hours, machine hours, or other unit-level allocation bases to assign the portion of overhead costs that move in tandem with the volume of production. However, unlike traditional systems, ABC also uses additional allocation bases that are not related to the volume of production to assign overhead costs that are not correlated with volume.
  • ABC systems may base the level of activity for each cost pool on the capacity of the activity rather than the budgeted level of activity which is always used in traditional cost systems. Using the budgeted level of activity to compute a predetermined overhead rate results in unused capacity costs being assigned to products. Using activity capacity to compute predetermined overhead rates isolates unused capacity costs as a period expense rather than assigning them to products.
  • There should be strong top management support. Without leadership from top management, some managers may not see any reason to change. Without top management support, the ABC implementation will be seen as unimportant. There should be cross-functional involvement. Since ABC affects people across departments, it should involve these people and be fully supported by them. If the accounting department alone attempts to impose ABC on others, skepticism and resistance are inevitable. A well designed ABC system requires intimate knowledge of many parts of an organization. This knowledge can only be learned from employees familiar with the various parts of an organization’s operations. ABC data should be linked to how people are evaluated and rewarded. If traditional non-ABC data continues to be used to evaluate employee performance, it sends the signal that ABC data is unimportant and can even be ignored.
  • Cost objects such as products generate activities. For example, a customer order generates the need to complete the activity of preparing a production order. Performing activities consumes resources. For example, preparing a production order uses a sheet of paper and it takes time to fill out. The consumption of resources causes costs. For example, the greater the number of sheets of paper used to prepare a production order and the greater the amount of time devoted to preparing the production order, the greater the cost.
  • There are six steps that lead to the successful implementation of activity–based costing:  Identify and define activities and activity cost pools.  Trace costs to activities and cost objects.  Assign costs to activity cost pools.  Calculate activity rates.  Assign costs to cost objects.  Prepare management reports.
  •  Identify and define activities and activity cost pools (The activities are often identified and defined by interviewing the employees that work in the respective overhead departments. The lengthy list of activities that emerges from this process is usually reduced to a handful by combining similar activities.) A common framework for combining activities in manufacturing companies is as follows: Unit-level activities are performed each time a unit is produced. For example, providing power to run processing equipment would be a unit- level activity.   Batch-level activities are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, setting up equipment and shipping customer orders are batch-level activities. Product-level activities relate to specific products and must be carried out regardless of how many batches are run or units produced and sold. For example, designing or advertising a product would be product-level activities. Customer-level activities relate to specific customers and are not tied to any specific product. For example, sales calls and catalog mailings would be customer-level activities. Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. For example, heating a factory and cleaning executive offices are organization-sustaining activities.
  • When combining these activities, they should be grouped together at the appropriate level. Batch-level activities should not be combined with unit-level activities, and so on. Furthermore, activities should only be combined within a level if they are highly correlated with each other.
  • Each combined group of activities forms what is called an activity cost pool which is defined as a “bucket” that accumulates costs related to a single allocation base. In an ABC system the term allocation base is replaced by the term activity measure, and the term cost driver is also used.
  • Two types of activity measures include:  Transaction driver – a simple count of the number of times that an activity occurs. This is the least accurate type of activity measure.  Duration driver – measures the amount of time needed to perform an activity. This is more accurate than a transaction driver, but it takes more effort to record.
  • In the Classic Brass example from the textbook, the ABC team selected five activity cost pools and corresponding activity measures: Activity Cost Pool Activity Measure  Customer orders Number of customer orders  Product design Number of product designs  Order size Machine-hours  Customer relations Number of active customers  Other Not applicable
  • The definition for each of the activity cost pools is: Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders. Product Designs - assigned all costs of resources consumed by designing products. Order Size - assigned all costs of resources consumed as a consequence of the number of units produced. Customer Relations – assigned all costs associated with maintaining relations with customers. Other – assigned all overhead costs that are not associated with the other cost pools.
  •  Whenever possible, directly trace overhead costs to activities and cost objects. The manufacturing and nonmanufacturing overhead costs for Classic Brass are as shown on your screen. Notice, the shipping costs can be directly traced to customer orders. The remainder of the overhead costs will be assigned to customer orders using the ABC cost pools.
  •  Assign costs to activity cost pools (this is also called first-stage allocation). The cross-functional employee interviews resulted in the resource allocations as shown. Notice: The indirect factory workers allocated twenty-five percent of their time to the customer orders activity, forty percent of their time to the product design activity, twenty percent of their time to the order size activity, ten percent of their time to customer relations, and five percent of their time to the “other” activity. On hundred percent of the factory building lease is allocated to the “other” activity. Since Classic Brass has a single production facility that it does not plan to contract or expand, the lease cost is an unavoidable organization-sustaining cost. The shipping costs have no corresponding allocation percentages. This is because the shipping costs will be directly traced to customer orders.
  • Once the percentage allocations have been determined, it is a simple matter to assign costs to activity cost pools. For example, the indirect factory wages assigned to the customer orders activity (one hundred twenty-five thousand dollars) is computed by multiplying the total amount of indirect factory wages (five hundred thousand dollars) by the percentage of time that indirect factory workers spent on this activity (twenty-five percent).
  • As another example, the factory equipment depreciation assigned to the customer orders activity (sixty thousand dollars) is computed by multiplying the total amount of factory equipment depreciation (three hundred thousand dollars) by the percentage of time that the factory equipment was used to support this activity (twenty percent).
  • The completed grid of first-stage allocations is shown on your screen.
  • The Classic Brass ABC team determined activity levels for each activity: 1,000 customer orders, 200 new designs, 20,000 machine-hours, 100 customer relations activities . This information enabled the team to compute ABC rates for each activity by dividing the total cost in each activity cost pool by the respective quantity of the activity measure.
  • The activity rate for each cost pool is computed by dividing the total cost for an activity cost pool by the total activity for that pool. For example, the customer orders activity rate is $315 per order, found by dividing three hundred fifteen thousand dollars by one thousand orders.. Importantly, this is an average figure. Notice, the “other” cost pool does not have an activity rate. This is because these organization-sustaining costs will not be assigned to customer orders.
  • Before proceeding, let’s get a visual perspective of the Classic Brass ABC system. The direct materials, direct labor and shipping costs were directly traced to customer orders.
  • The first-stage allocation process assigned the remaining overhead costs to the five activity cost pools.
  • Then, activity measures were identified, activity levels were determined, and activity rates were computed for each activity as shown earlier. These rates will be used in the next step to assign overhead costs to customer orders.
  • For each activity cost pool, the amount of activity consumed by the product (or customer) is multiplied by the activity rate to arrive at the amount of overhead cost applied to the product (or customer). For example, let’s look at the following data for one Classic Brass customer (Windward Yachts) that bought two products (standard stanchions and custom compass housings). Detailed costs for both products and the number of each product ordered by Windward Yachts are shown on your screen.
  • The second stage allocations show that six hundred thirty dollars from the customer orders pool and three thousand eight hundred dollars from the order size pool were assigned to the standard stanchions. Similarly, three hundred fifteen dollars (from the customer orders pool), one thousand two hundred eight-five dollars (from the product design pool), and seventy-six dollars (from the order size pool) were assigned to custom compass housings.
  • Two management reports that can be prepared include a product margin report and a customer margin report. The product margin is calculated by deducting directly traceable costs and ABC costs from sales. Notice, the product margins for standard stanchions and custom compass housings are five thousand thirty dollars and a loss of one thousand one hundred fourteen dollars, respectively.
  • The customer margin of two hundred forty-one dollars is calculated by subtracting the customer-level costs (three thousand six hundred seventy-five dollars) from the combined product margins for both products (three thousand nine hundred sixteen dollars).
  • Continuing with the Classic Brass example, assume that the company uses a plantwide predetermined overhead rate based on machine hours. In this case: The predetermined overhead rate would be fifty dollars per machine hour. The manufacturing overhead assigned to stanchions and the compass housing would be ten thousand dollars and two hundred dollars, respectively. The product margins for stanchions and compass housings would be a negative three hundred sixty dollars and three hundred eighty seven dollars, respectively.
  • The product margins for the traditional system are dramatically different from the ABC system for four reasons:  The traditional system spreads product design costs across both products based on machine hours. The ABC system assigned product design costs to a product only if it required product design work.  The traditional cost system assigns customer order costs, a batch-level cost, using a unit-level allocation base, namely machine hours. The ABC system assigns these batch-level costs using a batch-level activity measure.  The traditional system assigns only manufacturing costs to the products. The ABC system also assigns nonmanufacturing costs to products.  The traditional system assigns all manufacturing costs to products. The ABC system does not assign organization-sustaining manufacturing costs to the products.
  • Generally speaking, when batch-level and product-level costs are present, ABC will shift costs from high volume products produced in large batches to low volume products produced in small batches. This cost shifting will usually have its greatest impact on the per unit cost of the low volume products.
  • Activity-based management is used in conjunction with ABC to identify areas that would benefit from process improvement, to actually improve processes, and to reduce costs. While the theory of constraints approach discussed in Chapter One is a powerful tool for targeting process improvement efforts, the activity rates computed in ABC can also provide valuable glues concerning where there is waste and the opportunity for improvement. Benchmarking can be used to compare an organization’s activity rates with standards of performance that are external to the organization.
  • There are four reasons why most companies do not use ABC for external reporting purposes:  External reports are less detailed than internal reports in the sense that individual product costs are not reported. External reports only disclose cost of goods sold and ending inventory. Therefore, if some products are undercosted and others are overcosted, the errors tend to cancel each other out when the product costs are added together.  It is often very difficult to change a company’s accounting system because it is deeply embedded within complex computer programs that have evolved over many years.  An ABC system, such as the one described in the chapter, does not conform to generally accepted accounting principles (GAAP). It excluded some organization-sustaining manufacturing costs and it included some nonmanufacturing costs in its product cost calculations. These cost system design attributes do not comply with GAAP.  Auditors are likely to be uncomfortable with cost allocations that are based upon interviews with the company’s personnel. This type of subjective data can be easily manipulated by management.
  • The limitations of activity-based costing are:                   Implementing and maintaining an ABC system requires substantial resources. The benefits of increased cost accuracy may not outweigh costs.  ABC systems produce numbers, such as product margins, that are at odds with the numbers produced by traditional cost systems. Managers are not accustomed to managing their operations using these numbers; hence, ABC inevitably faces resistance. This underscores the importance of having top management support for and cross-functional involvement with the ABC implementation. In practice, most managers insist on fully allocating all costs to products. The ABC system described in this chapter does not conform to this preference.  ABC systems do not automatically identify the relevant costs for particular decisions; therefore, ABC data can be easily misinterpreted and must be used with care when making decisions. Costs assigned to products, customers, and other cost objects are only potentially relevant. Most organizations use ABC as a supplement to rather than a replacement for their existing cost system. Maintaining two cost systems is costlier than maintaining just one system and it may cause confusion about which set of numbers is to be relied on.
  • A conventional ABC analysis does not identify potentially relevant costs. An action analysis report can help in this regard because it shows what costs have been assigned to a cost object and it indicates how difficult it would be to adjust those costs in response to changes in the level of activity.
  • Constructing an action analysis report begins with the first-stage allocation process. In addition to computing an overall activity rate for each activity cost pool, an activity rate is computed for each type of overhead cost that is consumed supporting a given activity. Let’s revisit the stage-one allocations from the Classic Brass example that we discussed earlier in the chapter.
  • Part I Rather than computing one activity rate for each activity cost pool as was done previously (see the bottom of the slide for these rates), an activity rate is computed for each type overhead cost (or for each cell in the matrix). Part II For example, the customer orders activity has six activity rates that sum to the total of three hundred fifteen dollars from the conventional ABC analysis.
  • Similarly, the second-stage allocation process requires assigning product costs by each type of overhead cost. In the Classic Brass illustration, there are, for example, six activity cost assignments from the customer orders activity to the standard stanchions. These six assignments total six hundred thirty dollars as in the conventional ABC analysis. Notice, the total ABC costs assigned to standard stanchions are four thousand four hundred thirty dollars which is the same as in the conventional ABC analysis.
  • As another example, there are four assignments from the product design activity to the custom compass housing. These four assignments total one thousand two hundred eighty-five dollars as in the conventional ABC analysis. Notice, the total ABC costs assigned to the custom compass housing is one thousand six hundred seventy-six dollars which is the same as in the conventional ABC analysis.
  • The next step in preparing an action analysis report is to label each cost using an ease of adjustment code. Green costs adjust more or less automatically to changes in activity level without any action by managers. For example, direct materials cost would automatically change in response to changes in activity level without management action. Yellow costs can be adjusted to changes in activity level, but it would require management action to realize the change in cost. For example, direct and indirect labor may be classified as yellow costs because management action would be required to hire or layoff employees. Red costs can be adjusted to changes in activity level only with a great deal of difficulty and with management intervention. For example, a factory building lease would be a red cost because it would be very difficult and expensive to break the lease.
  • The last step is to calculate green, yellow, and red margins. For example, the green, yellow, and red margins for the custom compass housing would be six hundred twelve dollars, a negative one thousand eighteen dollars, and a negative one thousand one hundred fourteen dollars, respectively. In this example, before managers would decide to eliminate the custom compass product line, they would need to commit to taking management action where required to reduce costs or redeploy resources.
  • Traditional costing can result in distorted product costs as all manufacturing costs are allocated to products using volume based activity measures, often charging products with resources they don’t use. Activity-based costing overcomes much of this problem by carefully relating resource consumption to activities and assigning costs to products and services using multiple activity rates.

Managerial Accounting by G. Norren Chap008 Managerial Accounting by G. Norren Chap008 Presentation Transcript

  • 11 th Edition Chapter 8
  • Activity-Based Costing: A Tool to Aid Decision Making Chapter Eight
  • Activity Based Costing (ABC)
    • ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore affect fixed as well as variable costs.
    ABC is a good supplement to our traditional cost system I agree!
  • How Costs are Treated Under Activity – Based Costing “ Best practice” ABC differs from traditional costing in five ways. Manufacturing costs Nonmanufacturing costs  ABC assigns both types of costs to products. Traditional product costing ABC product costing
  • How Costs are Treated Under Activity – Based Costing
    • ABC does not assign all manufacturing costs to products.
    Manufacturing costs Nonmanufacturing costs “ Best practice” ABC differs from traditional costing in five ways. Traditional product costing ABC product costing All Most, but not all Some
  • How Costs are Treated Under Activity – Based Costing Plantwide Overhead Rate Departmental Overhead Rates Activity – Based Costing Number of cost pools Level of complexity “ Best practice” ABC differs from traditional costing in five ways.
    • ABC uses more cost pools.
  • How Costs are Treated Under Activity – Based Costing “ Best practice” ABC differs from traditional costing in five ways.
    • ABC uses more allocation bases.
    Traditional Costing Number of Allocation Bases ABC Bases usually rely solely on volume measures. Volume measures plus other bases.
  • How Costs are Treated Under Activity – Based Costing “ Best practice” ABC differs from traditional costing in five ways.
    • ABC uses more allocation bases.
    The most commonly used allocation base in traditional costing is direct labor hours. Direct labor hours work well when overhead increases as direct labor hours increase.
  • How Costs are Treated Under Activity – Based Costing
    • Problems:
    • In many processes, overhead is increasing while direct labor is decreasing.
    • Variety and complexity of products is increasing.
    The most commonly used allocation base in traditional costing is direct labor hours. “ Best practice” ABC differs from traditional costing in five ways.
    • ABC uses more allocation bases.
  • How Costs are Treated Under Activity – Based Costing “ Best practice” ABC differs from traditional costing in five ways.
    • ABC uses more allocation bases.
    All overhead costs are not related to volume measures like direct labor hours. ABC uses volume as well as other allocation bases not related to the volume of production.
  • How Costs are Treated Under Activity – Based Costing “ Best practice” ABC differs from traditional costing in five ways. Traditional Costing The predetermined overhead rate is based on budgeted activity. This results in applying all overhead costs including unused, or idle capacity costs to products. ABC Products are charged for the costs of capacity they use – not for the costs of capacity they don’t use. Unused capacity costs are treated as period expenses.
    • ABC bases level of activity on capacity.
  • Characteristics of Successful ABC Implementations Strong top management support Cross-functional involvement Link to evaluations and rewards
  • Designing an ABC System Cost Objects (e.g., products and customers) Activities Consumption of Resources Cost
  • Designing an ABC System
    • Steps for Implementing ABC
    • Identify and define activities and activity cost pools.
    • Trace costs to activities and cost objects.
    • Assign costs to activity cost pools.
    • Calculate activity rates.
    • Assign costs to cost objects.
    • Prepare management reports.
  •  Identify and Define Activities and Activity Cost Pools Manufacturing companies typically combine their activities into five classifications. Unit-Level Activity Batch-Level Activity Product-Level Activity Customer-Level Activity Organization- sustaining Activity
  •  Identify and Define Activities and Activity Cost Pools Activities should only be combined within a level if they are highly correlated. When combining activities, they should be grouped together only at the appropriate level.
  •  Identify and Define Activities and Activity Cost Pools
    • An Activity Cost Pool is a “bucket” in which costs are accumulated that relate to a single activity measure in the ABC system.
    $ $ $ $ $ $
  •  Identify and Define Activities and Activity Cost Pools Two types of activity measures: Simple count of the number of times an activity occurs. Transaction driver A measure of the amount of time needed for an activity. Duration driver
  •  Identify and Define Activities and Activity Cost Pools
    • At Classic Brass, the ABC team, selected the following activity cost pools and activity measures:
  •  Identify and Define Activities and Activity Cost Pools
    • Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders.
    • Product Designs - assigned all costs of resources consumed by designing products.
    • Order Size - assigned all costs of resources consumed as a consequence of the number of units produced.
    • Customer Relations – assigned all costs associated with maintaining relations with customers.
    • Other – assigned all overhead costs that are not associated with the other cost pools.
  •  When Possible, Directly Trace Overhead Costs to Activities and Cost Objects
  •  Assign Costs to Activity Cost Pools At Classic Brass the following distribution of resource consumption across activity cost pools is determined. ** Not included because they are directly traced to customer orders.
  •  Assign Costs to Activity Cost Pools Indirect factory wages $500,000 Percent consumed by customer orders 25% $125,000
  •  Assign Costs to Activity Cost Pools Factory equipment depreciation $300,000 Percent consumed by customer orders 20% $ 60,000
  •  Assign Costs to Activity Cost Pools
  •  Calculate Activity Rates
    • The ABC team determines that Classic Brass will have these total activities for each activity cost pool . . .
      • 1,000 customer orders,
      • 200 new designs,
      • 20,000 machine-hours,
      • 100 customer relations activities.
    Now the team can compute the individual activity rates by dividing the total cost for each activity by the total activity levels.
  •  Calculate Activity Rates
  • Activity-Based Costing at Classic Brass Direct Materials Direct Labor Shipping Costs Overhead Costs Cost Objects: Products, Customer Orders, Customers Traced Traced Traced
  • Activity-Based Costing at Classic Brass Direct Materials Direct Labor Shipping Costs Cost Objects: Products, Customer Orders, Customers Order Size Customer Orders Product Design Customer Relations Other Overhead Costs First-Stage Allocation
  • Activity-Based Costing at Classic Brass Direct Materials Direct Labor Shipping Costs Cost Objects: Products, Customer Orders, Customers Order Size Customer Orders Product Design Customer Relations Other Overhead Costs First-Stage Allocation Second-Stage Allocations $/MH $/Order $/Design $/Customer Unallocated
  •  Assigning Costs to Cost Objects
    • Let’s take a look at how our system works for just one customer – Windward Yachts.
    Standard Stanchions (no design required) 1. 400 units ordered with 2 separate orders. 2. Each stanchion required 0.5 machine-hours. 3. Selling price is $34 each. 4. Direct materials total $2,110. 5. Direct labor totals $1,850. 6. Shipping costs total $180. Custom Compass Housing (requires new design) 1. One order during the year. 2. Each housing required 4 machine-hours. 3. Selling price is $650 each. 4. Direct materials total $13. 5. Direct labor totals $50. 6. Shipping costs total $25.
  •  Assigning Costs to Cost Objects The customer-level cost is assigned to customers directly; it is not assigned to products.
  •  Prepare Management Reports
  •  Prepare Management Reports Customer Profitability Analysis
  • Product Margins Traditional Cost Accounting System 400 units x 0.5 MH/unit x $50/MH = $10,000 Predetermined manufacturing overhead rate $1,000,000 20,000 MH = $50/MH =
  • Differences Between ABC and Traditional Product Costs
    • Product margins are different for four reasons:
    • Traditional costing assigns design costs to both products based on machine hours. ABC assigns product design costs to a product only if product design work is required.
    • Traditional costing assigns customer order costs, a batch- level cost, using a unit-level allocation base, machine hours. ABC assigns these batch-level costs using a batch-level activity measure.
    • Traditional costing assigns only manufacturing costs to products. ABC also assigns nonmanufacturing costs to products.
    • Traditional costing assigns all manufacturing costs to products. The ABC system does not assign organization- sustaining manufacturing costs to the products.
  • Differences Between ABC and Traditional Product Costs When batch-level and product-level costs are present, ABC will usually shift costs from high volume products, produced in large batches, to low volume products produced in small batches. This cost shifting will usually have its greatest impact on the per unit cost of the low volume products.
  • Targeting Process Improvement Activity-based management is used in conjunction with ABC to identify areas that would benefit from process improvements. While the theory of constraints approach discussed in Chapter 1 is a powerful tool for targeting improvement efforts, activity rates can also provide valuable clues on where to focus improvement efforts.
  • Activity-Based Costing and External Reporting Most companies do not use ABC for external reporting because . . .
    • External reports are less detailed than internal reports.
    • It may be difficult to make changes to the company’s accounting system.
    • ABC does not conform to GAAP.
    • Auditors may be suspect of the subjective allocation process based on interviews with employees.
  • ABC Limitations Substantial resources required to implement and maintain. Resistance to unfamiliar numbers and reports. Desire to fully allocate all costs to products. Potential misinterpretation of unfamiliar numbers. Does not conform to GAAP. Two costing systems may be needed.
  • Appendix 8A: ABC Action Analysis
    • Conventional ABC analysis does not identify potentially relevant costs. An action analysis report helps because it:
      • Shows what costs have been assigned to a cost object.
      • Indicates how difficult it would be to adjust those costs in response to changes in the level of activity.
  • Appendix 8A: ABC Action Analysis Constructing an action analysis report begins with the first-stage allocation process. In addition to computing an overall activity rate for each activity cost pool, an activity rate is computed for each type of overhead cost that is consumed supporting a given activity. Let’s revisit the stage-one allocations from the Classic Brass example that we discussed earlier.
  • Appendix 8A: ABC Action Analysis $125,000 ÷ 1,000 orders = $125 per order Other entries in the table are computed similarly.
  • Appendix 8A: ABC Action Analysis $125 per order × 2 orders = $250 Other entries in the table are computed similarly.
  • Appendix 8A: ABC Action Analysis $125 per order × 1 orders = $125 Other entries in the table are computed similarly.
  • Appendix 8A: ABC Action Analysis
    • Next, label each cost using an ease of adjustment code:
    • Green costs adjust more or less automatically to changes in activity level without any action by managers.
    • Yellow costs can be adjusted to changes in activity level, but it would require management action to realize the change in cost.
    • Red costs can be adjusted to changes in activity level only with a great deal difficulty and with management intervention.
  • Appendix 8A: ABC Action Analysis
  • End of Chapter 8