Join us. What do you think? Do you recognize the practical explanation or do you have more suggestions? What are your success factors for using a certain costing method?
How to cite this article: Van Vliet, V. Your rating is more than welcome or share this article via Social media! Vote count: 3. No votes so far! Be the first to rate this post. Find out more Tagged: costing methods Leave a Reply Cancel reply You must be logged in to post a comment. By making access to scientific knowledge simple and affordable, self-development becomes attainable for everyone, including you! Join our learning platform and boost your skills with Toolshero. Try Toolshero for free!
Corporate Plans Publish your research my account Try us for free. Did you find this article interesting?
We are sorry that this post was not useful for you! There is no need to conduct surveys, although in large organizations, surveying employees may help. It is important to stress, though, that the question is not about the percentage of time an employee spends doing an activity say, processing orders but how long it takes to complete one unit of that activity the time required to process one order.
Once again, precision is not critical; rough accuracy is sufficient. The cost-driver rates can now be calculated by multiplying the two input variables we have just estimated.
Once you have calculated these standard rates, you can apply them in real time to assign costs to individual customers as transactions occur. The standard cost rates can also be used in discussions with customers about the pricing of new business.
The reason for this difference becomes obvious when we recalculate the quarterly cost of performing the customer service activities. This takes care of the technical drawback of traditional ABC systems we mentioned earlier—the fact that surveyed employees respond as if their practical capacity were always fully utilized. But while that distribution did reflect how workers spent their productive time, the fact that their total productive time was significantly less than their practical capacity of 32 hours per worker per week was completely ignored.
The calculation of resource costs per time unit forces the company to incorporate estimates of the practical capacities of its resources, allowing the ABC cost drivers to provide more accurate signals about the cost and the underlying efficiency of its processes. Note that the report highlights the difference between capacity supplied both quantity and cost and the capacity used. Managers can review the cost of the unused capacity and contemplate actions to determine whether and how to reduce the costs of supplying unused resources in subsequent periods; they can then monitor those actions over time.
In some cases, the information can save companies that are considering expansion from making unnecessary new investments in capacity. Rather than attempt to downsize the plant, he decided to maintain the capacity for a large contract he expected to win later that year, for which he otherwise would have created new capacity.
Managers can easily update their time-driven ABC models to reflect changes in operating conditions. Managers can also easily update the cost-driver rates. Two factors can cause these rates to change. First, changes in the prices of resources supplied affect the cost per time unit of supplying capacity. If new machines are substituted or added to a process, the resource cost rate is modified to reflect the change in operating expense associated with introducing the new equipment.
The second factor that can cause a change in the activity cost-driver rate is a shift in the efficiency of the activity. Quality programs, continuous improvement efforts, reengineering, or the introduction of new technology can enable the same activity to be done in less time or with fewer resources. When permanent, sustainable improvements in a process have been made, the ABC analyst recalculates the unit time estimates and therefore the demands on resources to reflect the process improvements.
For example, if the customer service department gets a new database system, the reps may be able to perform a standard credit check in 20 minutes rather than 50 minutes. By updating the ABC model on the basis of events rather than on the calendar once a quarter or annually , you get a much more accurate reflection of current conditions.
Any time analysts learn about a significant shift in the costs of resources supplied or the practical capacity of those resources, or about a change in the resources required to perform the activity, they update the resource cost per time unit, or resource cost rate, estimates.
And any time they learn of a significant and permanent shift in the efficiency with which an activity is performed, they update the unit time estimate. So far, we have relied on an important simplifying assumption that all orders or transactions of a particular type are the same and require the same amount of time to process.
But time-driven ABC does not demand this simplification. It can accommodate the complexity of real-world operations by incorporating time equations, a new feature that enables the model to reflect how order and activity characteristics cause processing times to vary.
Time equations greatly simplify the estimating process and produce a far more accurate cost model than would be possible using traditional ABC techniques. The key insight is that although transactions can easily become complicated, managers can usually identify what makes them complicated.
In this situation, complexity arises from the potential need for special packaging and the additional demands of air as opposed to ground transportation. If the item requires a new package, however, the manager estimates, either from experience or from making several observations, that an additional 6. And if the item is to be shipped by air, he or she knows or can quickly determine that it will take about 2 minutes to put the package in an air-worthy container.
These order- and transaction-specific data enable the particular time demands for any given order to be quickly determined using a calculation like the one above. Thanks to this extension, the time-driven approach to ABC can capture the complexities of business far more simply than the traditional ABC system could, which might well have had to account for varying transaction times by treating each variant of the process as a distinct activity.
Consider the case of Hunter Corporation not its real name , a large, multinational distributor of scientific products, whose 27 facilities process more than one million orders each month to distribute up to , different product SKUs to 25, customers.
Its old ABC model required that employees in its inside sales department the salespeople handling phone and Internet orders rather than dealing with customers face-to-face estimate each month the percentage of their time that they spend on three activities: customer setup, order entry, and order expediting.
The team learned that it took about 5 minutes to enter the basic order information, plus 3 minutes for each line item, and an additional 10 minutes if the order had to be expedited. Following the approach described earlier, the previous three-activity model was replaced by a single time equation:. The model multiplied the estimated sales process time by the departmental cost per minute to arrive at the cost of processing each order. Hunter could now obtain a more accurate and nuanced estimate of its costs in the unit while simultaneously reducing the complexity of the process for gathering and analyzing the data.
Hunter has since rolled out time-driven ABC over all its operations. The results have been dramatic:. The kind of rollout Hunter conducted is not difficult to achieve. Time-driven ABC models can be easily applied and customized for other plants and companies within an industry because the processes they use are similar. You could probably apply the same time-driven ABC model to all of us. CGMA designation holders qualify through rigorous education, exam and experience requirements.
Search Menu. Latest Stories. What is it? Practice CIMA Official Terminology describes activity-based costing as an approach to the costing and monitoring of activities, which involves tracing resource consumption and costing final outputs.
The activity-based costing process: What benefits does ABC provide? Questions to consider when implementing ABC Do we fully understand the resource implications of implementing, running and managing ABC? Do we have the resources to implement ABC? Will the costs outweigh the benefits? Can we easily identify all of our activities and costs? Do we have sufficient stakeholder buy-in? What will it take to achieve this? Will the additional information ABC provides result in action that will increase overall profitability?
ABC provides business managers, as well as the finance function, with the information needed to make value-based decisions Use ABC for pricing and product prioritisation decisions ABC should be implemented by management accountants as they are best placed to manage the process and to ensure benefits realisation Do not get caught up in too much attention to detail and control.
It can obscure the bigger picture or make the firm lose sight of strategic objectives in a quest for small savings It is important not to fall into the trap of thinking ABC costs are relevant for all decisions. Related Articles.
0コメント