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1314-IBMS-IBO-FIN-lecture 3
CHAPTER 23Performance Measurement, Compensation, and MultinationalConsiderations
CHAPTER 5Activity-Based Costing and Activity-based Management
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Homework2-2!
2-"
Additional info #about t$e literature to study%will be publis$ed on BB&
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2-2!
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2-"
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CHAPTER 5Activity-Based Costing
and
Activity-Based Management
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Background'ecall t$at performance of sub-units can be
measured by using '(), '), and *+A etc&
All of t$ese measures include incomeprot&
)ncome #t$ink of an income statement% canbe calculated by subtracting costs fromrevenues&
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Basic Cost .erminologyCost/sacriced resource to ac$ieve a specic
ob0ective
Actual cost/a cost t$at $as occurredBudgeted cost/a predicted cost
Cost ob0ect/anyt$ing of interest for w$ic$ acost is desired
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Basic Cost .erminologyCost accumulation/a collection of cost data
in an organi1ed mannerCost assignment/a general term t$at
includes gat$ering accumulated costs to acost ob0ect& .$is includes .racing accumulated costs wit$ a direct
relations$ip to t$e cost ob0ect and
Allocating accumulated costs wit$ an indirectrelations$ip to a cost ob0ect
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3irect and )ndirect Costs3irect costs can be conveniently and
economically traced #tracked% to a cost ob0ect&
)ndirect costs cannot be conveniently oreconomically traced #tracked% to a cost ob0ect&)nstead of being traced, t$ese costs areallocated to a cost ob0ect in a rational andsystematic manner&
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BM4 Assigning Costs to a
Cost (b0ect
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Cost *5amples3irect CostsParts
Assembly line wages)ndirect Costs*lectricity
'ent
Property ta5es
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o e os e av or slooking at costs in a di7erent
way8+ariable costs/c$anges in total in proportion
to c$anges in t$e related level of activity orvolume&
9i5ed costs/remain unc$anged in totalregardless of c$anges in t$e related level ofactivity or volume&Costs are 5ed or variable only wit$ respect to
a specic activity or a given time period&
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Cost Be$avior+ariable costs are constant on a per-unit
basis& )f a product takes : pounds ofmaterials eac$, it stays t$e same per unitregardless if one, ten, or a t$ousand unitsare produced&
9i5ed costs c$ange inversely wit$ t$e level
of production& As more units are produced,t$e same 5ed cost is spread over more andmore units, reducing t$e cost per unit&
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Cost Be$avior ;ummari1edTotal Dollars Cost per Unit
Variable Costs
Change in
proportion withoutput
More output = More cost
i!ed Costs"nchanged in
relation to output
Change inversel#with output
More output = lower cost
per unit
Total Dollars Cost Per Unit
Variable Costs
Change in
proportion withoutput
More output =
More cost
"nchanged in
relation to output
i!ed Costs "nchanged inrelation to output
Change
inversel# withoutput
More output =
lower cost
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Multiple Classication of
CostsCosts may be classied as3irect)ndirect, and
+ariable9i5ed
.$ese multiple classications give rise toimportant cost combinations3irect and variable
3irect and 5ed)ndirect and variable
)ndirect and 5ed
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Multiple Classication of
Costs, +isuali1ed
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Back to indirect costsHow to allocate t$ese costs to a cost ob0ect<
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Background'ecall t$at factory over$ead is applied to
production in a rational systematic manner,using some type of averaging& .$ere are a
variety of met$ods to accomplis$ t$is goal& .$ese met$ods often involve trade-o7s
between simplicity and realism&
;imple Met$ods Comple5Met$ods
=nrealistic 'ealistic
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Broad AveragingHistorically, rms produced a limited variety
of goods w$ile t$eir indirect costs wererelatively small&
Allocating over$ead costs was simple usebroad averages to allocate costs uniformlyregardless of $ow t$ey are actually incurred&Peanut-butter costing
.$e end-result overcosting and undercosting
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(ver and =ndercosting(vercosting/a product consumes a low level
of resources but is allocated $ig$ costs perunit&
=ndercosting/a product consumes a $ig$level of resources but is allocated low costsper unit&
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Cross-subsidi1ation .$e results of overcosting one product and
undercosting anot$er& .$e overcosted product absorbs too muc$
cost, making it seem less protable t$an itreally is& .$e undercosted product is left wit$ too little
cost, making it seem more protable t$an it
really is&
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:->?@ets $ave a look at :->? to nd out $ow t$is
ABC actually works&
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Conclusions*ac$ met$od is mat$ematically correct&*ac$ met$od is acceptable&*ac$ met$od yields a di7erent cost gure, w$ic$
will lead to di7erent gross margin calculations&(nly over$ead is involved& .otal costs for t$e
entire rm remain t$e same/t$ey are 0ustallocated to di7erent cost ob0ects wit$in t$e rm&
;election of t$e appropriate met$od and driverss$ould be based on e5perience, industrypractices, as well as a cost-benet analysis ofeac$ option under consideration&
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'ationale for ;electing a More
'ened Costing ;ystem)ncrease in product diversity
)ncrease in indirect costs
Advances in information tec$nologyCompetition in foreign markets
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