ABC/M Primer: An Introduction to Activity Based Cost Management

1. ABC/M Primer: An Introduction to Activity Based Cost Management

2. Topics Covered • What is Activity Based Cost Management? • ABC/M vs. Traditional Cost Accounting • The Components of ABC/M Models • Resource Costs and Resource Drivers • Activities and Activity Drivers • Cost Objects • Summary of Key Concepts • Table of Key Terms The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

3. What is Activity Based Cost Management? • Activity Based Cost Management (ABC/M) is a cost allocation system that provides greater insight into the true operational costs of an organization and illuminates options to improve ways of doing business • The basic idea in ABC/M is work activities cause costs through their consumption of an organization’s resources, and that cost objects (i.e., products) create a need for performing these work activities. The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

4. ABC/M vs. Traditional Cost Accounting • In ABC/M activities are used as intermediaries for assigning the costs of resources to products and services. This approach provides insights into how efficiently and effectively resources are used and how work activities contribute to the costs of the organization. • In Traditional Cost Accounting the costs of resources are assigned to the products they produce. In this system direct resource costs are assigned to the products or services for which they are incurred, while overheard resource costs are spread among products and services based on an allocation scheme. Typically, costs are reported by operating unit or division. The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

5. The Components of ABC Models • ABC/M is a cost allocation methodology. ABC/M operates on the premise that activities incur costs through the consumption of resources, while customer demand for products and services causes activities to be performed. • The diagram below illustrates how ABC traces costs from an organization’s general ledger to the work it performs, and then to its products, services, and customers (i.e., cost objects). • Resource drivers determine the degree to which a resource is consumed by each activity, while activity drivers determine how products, services, and customers consume those same activity costs. The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

6. Resource Costs and Resource Drivers • Resources are the elements used to perform work. This includes labor, materials, and facilities • A resource driver is a measure of the consumption of a resource, used to determine the portion of total resource cost assigned to each activity • Examples of resource drivers are the percent of time employees spent on each activity or the square feet dedicated to particular activities The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

7. Activities and Activity Drivers • Activities are a step in a process that uses resources to perform work. An activity occurs over time and has recognizable results. • An Activity Driver is a measure of the frequency of activity performance and the effort required to achieve the end result • Examples of activity drivers are number of items produced, number of customers served The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

8. Cost Objects • A cost object is an item that an organization wishes to gain financial and non-financial information about through cost and performance management • Typically, cost objects are the products and services that a business provides. For an auto manufacturer, cost objects can include automobiles manufactured, auto loans sold, replacement parts, etc. • At FWS, cost objects are the goals of the organization The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

9. Summary of Key Concepts • Activity Based Cost Management (ABC/M) is a cost allocation system that provides greater insight into the true operational costs of an organization • In ABC/M resources are consumed by activities which are necessary to produce cost objects • Unlike Traditional Cost Accounting which reports costs at the operating unit or division level, ABC/M allows managers to see the individual work activities that are consuming costs The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD

10. Table of Key Terms The information in this training is based on the book "Activity Based Costing & Performance" written by Karen B. Burk and Douglas W. Webster, PhD