Activity Based Costing and Lean Accounting http:www.managementsupport.com

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Activity Based CostingandLean Accounting
http//www.managementsupport.com
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Outline

• What is Activity Based Costing?
• Cost Accounting Systems
• Traditional Cost Systems
• Activity Based Costing
• Implementing ABC
• Benefits Limitations of ABC
• Lean Accounting

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Traditional, Volume-Based Product-Costing System

• With these product costs, Aerotech established
  target selling prices (Cost 125).

209.00 x 1.25
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Activity-Based Costing Step 2

• Two pieces of information are required to compute
  the cost-driver rate
• Activity Cost
• Activity Volume

EXAMPLE 1 XCo has 4 employees in its Quality
Control Dept. Salaries and costs for the
department total 360,000 per year. XCo produces
500,000 units of product a year. What is the
appropriate activity, of employees or units of
product? What is the cost-driver rate?
EXAMPLE 1 The proper activity in this case is
the of units produced. The cost-driver rate
would be 360,000 500,000 units .72 per unit
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Benefits of Activity-Based Costing

• ABC leads to more activity cost pools with more
  relevant cost drivers
• ABC leads to enhanced control of overhead costs
  since overhead costs can be more often traced
  directly to activities
• ABC leads to better management decisions by
  providing more accurate product costs, which
  contributes to setting selling prices that will
  achieve desired product profitability levels

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Activity-Based Management Model
Cost View
Resources
Operational View
Activities
Driver Analysis
Performance Analysis
Products Customers
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Lean Accounting Element 3

• A valid assessment of the financial impact of
  lean manufacturing improvement.
• Many companies are looking for short-term cost
  cutting to come from their lean efforts.
• They are usually disappointed. Lean manufacturing
  does not cut costs it turns waste into available
  capacity.
• The financial impact comes as you make decisions
  on how to use this capacity (and the cash flow
  from reduced inventory).
• These are strategic decisions. Lean Accounting
  uses a specific tool for understanding the impact
  of lean changes on the company financially.