Activity-Based Costing and Management (Portfolio 5306)

Bloomberg Tax Portfolio No. 5306, Activity-Based Costing and Management (Accounting Policy and Practice Series), explains activity-based costing (ABC) and shows how it can provide useful information to help management improve organizational performance.

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Bloomberg Tax Portfolio No. 5306, Activity-Based Costing and Management (Accounting Policy and Practice Series), explains activity-based costing (ABC) and shows how it can provide useful information to help management improve organizational performance. Determining the cost of resources used for carrying out activities and assigning that cost to the products and other cost centers falls within the area of cost accounting. ABC is the method preferred by many companies in the modern environment, and one of the purposes of this Portfolio is to help potential users understand this system. Other aspects of activity analysis are used for various managerial purposes, including planning, controlling, and decision making. The best and most beneficial use of activity analysis is to combine the cost and other information provided by ABC with managerial functions; this is then referred to as activity-based management (ABM). This Portfolio explores many such managerial practices.
The Portfolio also analyzes the differences between ABC and generally accepted accounting principles (GAAP) in the areas of product costs and segment analysis. It shows how a company using ABC can prepare external reports under GAAP without compromising the principles of ABC for itnernal purposes.
This Portfolio may be cited as Bloomberg Tax Portfolio 5306, Agrawal and Brimson, Activity-Based Costing and Management (Accounting Policy and Practice Series).


Surendra P. Agrawal, Ph.D.

Surendra P. Agrawal, Ph.D. (Accounting), University of Florida. Dr. Agrawal is a Professor of Accounting, Emeritus, at the School of Accountancy, University of Memphis. He has been a member of numerous professional organizations, including the Institute of Management Accounting, American Institute of Certified Public Accountants, Decision Sciences Institute, and the Institute of Chartered Accountants of India. He has authored several books and his papers have appeared in numerous professional journals published in many countries.

James A. Brimson, ABD

James A. Brimson, ABD (Finance), North Texas State University, MBA Arizona State University. Mr. Brimson is the founder of the Activity Based Management Institute, which researches process theory and adaptive management. Previously, Mr. Brimson was the CAM-I Project Director for the Cost Management Project that led to the development of Activity-Based Accounting. As a consultant, he has helped many organizations implement Activity-Based Accounting and Management systems. He has authored several books on Activity-Based Accounting and Management and has been a frequent speaker throughout the world on the subject.

Table of Contents

Portfolio Description



Detailed Analysis

I. Background, Purpose, and Scope of Portfolio

A. Transforming the Management Information Process

B. Need for Dynamic Cost Flow Reporting

C. Purpose and Scope of Portfolio

II. Activity Analysis and Costing for Manufacturing Organizations: Basic Principles

A. Process Management and ABC

B. Basic Example: ABC vs. Traditional Cost Accounting

C. Basic Concepts of ABC

D. Implementation of ABC

1. Identifying Activities and Resources Used

2. Assigning Activity Costs to Products

E. A Simple Example of ABC Computations

1. Absorption Costing With a Single Plantwide Rate

2. Absorption Costing With Departmental Rates

3. Direct Costing

4. Standard Costing

5. Summary of Alternative Methods vs. ABC

F. Conclusions

III. Cost of Unused Capacity

A. Introduction

B. Concepts of Capacity

C. Separation of Product Costs and Cost of Unused Capacity

D. Expanded Example of the Midsouth Company

E. Comprehensive Example

1. Traditional Costing System

2. Activity-Based Costing System

3. Differences Between the Traditional System and ABC

F. Usefulness of ABC Information

G. Conclusions

IV. Analysis of Non-Manufacturing Activities

A. Introduction

B. Nature of Non-Manufacturing Activities

1. Start-Up and Growth

2. Maturity

C. Vendor-Related Functions

D. Product-Related Functions

E. Customer-Related Functions

1. Activities Relating to Individual Customers

2. Activities Relating to Distribution Channels

3. Activities Relating to Other Customer Groupings

F. Internal Support and General Administration

G. Reengineering

1. Business Process Improvement

2. Value Engineering

H. Conclusion

V. Service Organizations

Introductory Material

A. Distinguishing Features of Service Organizations

B. Need for Activity-Based Analysis and Costing

C. Health Care Organizations

1. Special Characteristics of HCOs Relating to Their Costs

2. Special Characteristics of HCOs Relating to Their Revenues

3. Contracts With Third-Party Payers

4. Cost Objects

5. Activities and Output Drivers

6. Cost of Unused Capacity

7. Practical ABC Mode

D. Activity-Based Costing and Analysis in Banks

E. Conclusions

VI. Profitability Analysis

A. Introduction

B. Product Profitability

1. Accounting for Revenues in Profitability Analysis

2. Accounting for Product Lines in Profitability Analysis

3. Creating Profitability Charts

C. Customer Profitability

1. In General

2. The Whale Curve (Pareto Law)

D. Strategic Business Unit and Region Profitability

E. Conclusions

VII. Management Initiatives, Part 1: Continuous Improvement and JIT

A. Introduction

B. A Model of Continuous Improvement

1. Motivation to Improve

2. Assessing Activity Value

a. Value-Adding and Essential Activities

b. Value-Adding but Non-Essential Activities

c. Non-Value-Adding but Essential Activities

d. Non-Value-Adding and Non-Essential Activities

3. The Activity-Based Model of Continuous Improvement

C. Just-in-Time System

1. JIT Purchasing

2. JIT Manufacturing

3. Cost of Implementing JIT

D. Conclusions

VIII. Performance Measurement and Quality Management

Introductory Material

A. Performance Measurement: The Balanced Scorecard

1. Perspectives of the BSC

a. Financial Perspective

b. Customer Perspective

c. Internal Business Process Perspective

d. Learning and Growth Perspective

2. Weakness of the Balanced Scorecard

B. Quality Management

1. Definition of Quality

2. Quality and Process Variation

C. Conclusion

IX. Theory of Constraints, Optimization, and Target Costing

Introductory Material

A. ABC and the Theory of Constraints

1. The Decision-Making Process

2. TOC and Unused Capacity Under ABC

B. Product-Mix Optimization

C. Target Costing

D. Conclusion

X. Planning, Control, and Decision Making

Introductory Material

A. Planning Functions

1. Operating Budgets

2. Manufacturing Overheads

3. Non-Manufacturing Costs

4. Cost-Volume-Profit Analysis

5. Capital Budgets

B. Control Functions

C. Decision Making

1. Special Orders

2. Outsourcing (Make or Buy) Decision

a. Selection of Activities to Be Outsourced

b. Other Considerations

c. An Example of a Make or Buy Decision

d. The Outsourcing Contract

e. The Activity-Based Model of an Outsourcing Contract

f. A Simple Illustration

3. Dropping a Product or Segment

D. Conclusions

XI. External Reporting

A. Introduction

B. External Reporting

1. Product Costs

2. Segment Reporting

C. Conclusions

Working Papers

Working Papers


Worksheet 1 Glossary of Acronyms

Worksheet 2 The Case for Activity-Based Analysis: A Short Story

Worksheet 3 Computation of Output Driver Rates for the Midsouth Company

Worksheet 4 Calculation of Midsouth Company's Product Costs Under ABC

Worksheet 5 Calculation of Midsouth Company's Product Costs Under the Traditional Absorption Costing System

Worksheet 6 Calculation of Midsouth Company's Product Costs Under the Costing System With Departmental Overhead Rates

Worksheet 7 Calculation of Midsouth Company's Product Costs Under Direct Costing

Worksheet 8 Calculation of Midshouth Company's Product Costs Under Standard Costing

Worksheet 9 Variance Analysis for Midsouth Company Under Standard Costing

Worksheet 10 Calculation of Product Costs of the Midsouth Company

Worksheet 11 Computation of the Cost of Unused Capacity of the Midsouth Company

Worksheet 12 Calculation of Output Driver Rates

Worksheet 13 Calculation of the Cost of Unused Capacity

Worksheet 14 Calculation of Product Costs

Worksheet 15 Profitability of Customers

Worksheet 16 Products and Activities of the Big City Corporation

Worksheet 17 Practical Capacity and Output Driver Rates for the Big City Corporation

Worksheet 18 Product Mix Optimization Model for the Big City Corporation

Worksheet 19 Estimated Cost of Manufacturing NPD

Worksheet 20 Output Driver Rates and Practical Capacity for the Midsouth Company

Worksheet 21 Cost of Resources Committed to the Contract by SPS

Worksheet 22 A Numerical Example of Differences Between GAAP and ABC