Chapter 7 Activity-Based Costing and Management

LEARNING OBJEC I!E"

Chapter 7 addresses the following questions: Q1 How is activity-based costing (A C! different fro" traditional costing# Q$ %hat are activities& and how are they identified# Q' %hat process is used to assign costs in an A C syste"# Q( How are cost drivers selected for activities# Q) %hat is activity-based "anage"ent (A *!# Q+ %hat are the benefits& costs& and li"itations of A C and A *# ,hese learning questions (Q1 through Q+! are cross-referenced in the te-tboo. to individual e-ercises and proble"s/

COM#LE$I % "%MBOL"
,he te-tboo. uses a coding syste" to identify the co"ple-ity of individual require"ents in the e-ercises and proble"s/ Questions Having a 0ingle Correct Answer: No Symbol ,his question requires students to recall or apply .nowledge as shown in the te-tboo./ ,his question requires students to e-tend .nowledge beyond the applications e shown in the te-tboo./ 1pen-ended questions are coded according to the s.ills described in 0teps for etter ,hin.ing (2-hibit 1/13!: 0tep 1 s.ills (4dentifying! 0tep $ s.ills (2-ploring! 0tep ' s.ills (5rioriti6ing! 0tep ( s.ills (2nvisioning!

7-$

Cost *anage"ent

&'E" ION"
7() 4f direct labor hours are used for tending "achines and equip"ent& s"all batches ta.e fewer direct labor hours and so are allocated less overhead/ However& if overhead costs increase "ore with setup ti"e than with direct labor costs& the cost to set up for a large batch is li.ely si"ilar to the cost of setting up a s"all batch/ ,he cost per unit is then probably "uch lower for the large batch than for the s"all batch/ 1rgani6ation-sustaining activities are activities related to the overall organi6ation and unaffected by custo"ers served or by quantities of products& batches& or units/ 7acilitysustaining activities are activities related to the overall operations of a production facility and unaffected by custo"ers served or by quantities of products& batches& or units/ Custo"er-sustaining activities are custo"er service activities that are independent of sales volu"es and "i-/ 5roduct-sustaining activities occur to support a product line or a single product if it is not part of a product line/ atch-level activities increase as the nu"ber of batches increase/ ,hese activities include setup and "onitoring batches of product/ 8nit-level activities increase proportionately with production volu"es or sales volu"es/ ecause A C uses "ore cost pools and "ore cost drivers to reflect cause and effect relationships& A C costs usually "ap the relation between cost and use of resources "ore accurately/ Hence A C costs reflect different proportions of the resource costs than do traditional costs/ 9o& increasing the nu"ber of cost pools and cost drivers can increase "easure"ent error because s"all "easure"ent errors for each pool and each driver can distort total cost once costs are allocated& si"ply fro" the increase in calculations that ta.e place/ 4n addition& if the production process is very si"ple and products use the sa"e a"ount of resources each& increasing the nu"ber of cost pools will not increase the accuracy of the allocations/ 9o& because it is e-pensive to i"ple"ent& the costs outweigh the benefits for so"e fir"s/ 7ir"s that are already operating efficiently "ay not benefit fro" an A C syste"& especially if they have available capacity/ :esearch has shown that A C is "ore successful within organi6ations that use fle-ible syste"s& have integrated infor"ation syste"s& and produce a variety of products/ ;es& A C can be used in service industries/ 4n service organi6ations& A C "ay be especially helpful if there are capacity li"its/ 0ervice industries often have a large proportion of fi-ed resources& and understanding the relationship between cost and the use of these resources can i"prove the efficiency of the organi6ation/ *easure"ent error could decrease because A C can do a better <ob of allocating costs to the use of resources/ etter allocation reduces proble"s such as product crosssubsidi6ation& in which costs are overallocated to so"e products and underallocated to others/ However& "easure"ent error could increase because increasing the nu"ber of cost pools and cost drivers results in s"all "easure"ent errors for each pool and each

7(*

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Chapter 7: Activity- ased Costing and *anage"ent

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driver/ As the nu"ber of calculations increase& these s"all "easure"ent errors interact as costs are allocated (rates are developed and used as "ultipliers!& and so the si6e of "easure"ent error is li.ely to increase/ 7(/ 0everal costs that are incurred when i"ple"enting an A C syste" include the ti"e it ta.es e"ployees or consultants to deter"ine appropriate cost pools and cost drivers& the cost to trac. and "easure the nu"ber of activities because these "ay not be recorded in the accounting syste"& and the cost to set up an infor"ation syste" to develop A C reports/ 0everal benefits include the ability to identify non-value added activities& and a better understanding of the use of overhead resources/ 7irst& "eet with accounting e"ployees to learn about all of the different activities they perfor"/ 4dentify activities that are ho"ogeneous and can be pooled together/ 7or e-a"ple& budget preparation for each depart"ent is probably si"ilar& but it "ay ta.e different a"ounts of ti"e according to the co"ple-ity of the depart"ent/ 5ool all of the various budgeting activities/ 1nce a list of activities has been identified& e"ployees= opinions about appropriate cost drivers can be solicited/ Activities that have the sa"e cost drivers could probably be pooled/ ;es& research has shown that A C is "ore successful within organi6ations that use fle-ible syste"s& have integrated infor"ation syste"s& and produce a variety of products/ %ith A C& a better "apping of the use of resources to each product line allows "anagers to choose the opti"al product "i-/ 4n addition& if the processes are co"ple-& A C allows analysis of the activities underlying co"ple- processes so i"prove"ents are easier to identify& as are non-value added activities/ 4n these cases& the costs are li.ely less than the benefits achieved/ Activity-based costing analy6es the activities perfor"ed in "anufacturing and service production/ 1nce the activities are identified& costs for each activity are collected into separate cost pools/ 9e-t a cost driver is chosen that reflects changes in the costs of activities/ ,he cost driver is used to allocate the costs of the activity to products& services& or so"e other cost ob<ect/ ,here are "ultiple cost pools and drivers/ ,raditional costing uses only a few overhead cost pools and allocates the costs based on drivers such as direct labor hours& direct labor cost& or "achine hours/ 4n a traditional cost syste"& the cost pools are very large and so it is i"possible to find an allocation base that reflects resource use/ 4t is "erely a logical syste" of assigning part of overhead costs to each product or service/ A C& on the other hand& selects cost pools around activities so that a cost driver can be chosen to better reflect a product or service=s use of resources/ ,herefore& A C syste"s have "ore cost pools and drivers/ ecause an A C syste" is "ore co"ple-& "ore ti"e& effort& and "oney are required to i"ple"ent A C syste"s than traditional costing syste"s/ Activity-based costing is a "ethod of allocating costs to products or other cost ob<ects/ Activity-based "anage"ent is the process of using A C infor"ation to i"prove operations and profitability by analy6ing the actual activities and processes to reduce non-value added activities& and i"prove the efficiency of activities/ 4n addition& "anagers "ay be able to better understand different products= uses of fi-ed resources& which could be i"portant if there are capacity constraints/

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7-(

Cost *anage"ent

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,here are several reasons for using A C and A * to i"prove an organi6ation=s environ"ental perfor"ance/ 2nviron"ent-related activities& such as disposing of ha6ardous substances and cleaning up spills of these substances& are non-value added/ 4f those types of activities can be "ini"i6ed& costs are also li.ely to be reduced/ 4n addition& "ost co"panies would prefer to avoid the negative reputation effects that are associated with pollution proble"s/ 1nce "anagers beco"e aware of environ"ental costs& they "ay reali6e that investing in prevention activities will actually reduce costs in the long run/ Prevention activities are activities perfor"ed to insure defect-free production/ ,hese activities could include inspecting inco"ing direct "aterials designing and redesigning products and "anufacturing processes to reduce defect rates identifying areas where defects arise and solving the underlying cause of the defects Appraisal activities are activities perfor"ed to identify defective units& and include the following activities: 4nspection of products 4nspection of "anufacturing process *onitoring of service delivery process ,esting Production activities are activities underta.en in the production or rewor. of failed units/ ,hese include >abor tas.s and "aterials to produce spoiled units :ewor.ing spoiled units Post-Sales activities are activities underta.en after the product has been sold to re"edy proble"s caused by defects and failed units/ ,hese activities include Accepting returned products and e-changing the" for good products or refunding their cost :epairing defective units 5reparing for and participating in legal actions that result fro" defective units

7(),

Chapter 7: Activity- ased Costing and *anage"ent

7-)

E$ERCI"E"
7()- ABC Cost 2ierarchy A/ :eceptionist salary is an organi6ation-level cost because the receptionist serves everyone who co"es through the door and thus cannot be identified with one product or unit/ / 7inancial forecasting software is an organi6ational-level cost if it is used to forecast sales for the entire co"pany/ However if it used only by one product line& it is a productsustaining cost/ C/ 5hotocopy "achine rental is a facility-level cost when everyone uses the "achine& but could be a product& batch or unit related cost if a password were used to .eep trac. of copies "ade for each client or depart"ent/ ?/ @anitorial service is a facility-level cost because the entire facility uses this evenly/ 2/ Audit "anager=s salary is a unit-level cost because the "anagers is in charge of a nu"ber of different audits and bills his or her ti"e to each audit/ 7/ >ong distance telephone charges are unit-level if the bill includes details of to who" the calls were "ade& and could be product-sustaining if the calls are "ar.eting a particular product/ 4t <ust depends upon the purpose of the calls/ 0o"e co"panies have %atts lines and pay a flat fee for all long distance calls/ 4n this case the cost is an organi6ation-level cost/ A/ *eal costs for entertaining clients could be a custo"er-sustaining cost if related only to that particular custo"er& or product related if the custo"er is associated with only one product/ H/ Costs of annual e"ployee golf party is an organi6ation-level because it benefits all depart"ents/ 4/ 1ffice supplies such as paperclips and tablets of paper are organi6ation-level costs unless they can be traced to a particular product or batch/ @/ Annual subscription for inco"e ta- regulations is a product-sustaining cost if it pertains to one depart"ent of the fir"/ 4f it pertains to the entire fir"& it is a facility-level cost/ 7(). MicroBre3 North3est 7ollowing are the C*A answers to this question/ However& one could argue that so"e of the unit-level costs could instead be categori6ed as batch-level/ A/ 7acility-level costs: *anufacturing facility B1&)33&333

7-+

Cost *anage"ent

/ 5roduct-sustaining costs: 5roduct develop"ent C/ atch-level costs: 5roduction setup

B1&$)3&333 B733&333 B C)3&333 $&)33&333

?/ 8nit-level costs: *aterials handling 5roduction line labor 5ower (assu"ing "ost power is to cool beer and run "achines& not for overhead! ,otal unit-level costs 7()7 ABC Cost 2ierarchy

)33&333 B'&C)3&333

A/ 8nit-level activities and costs relate to each unit produced& in this case& each car rented/ ,he cost of washing each car between rentals is an e-a"ple of a unit level cost/ Costs for the activities of "a.ing the reservation& turning the vehicle over to the renter& and co"pleting the paperwor. at the end of the rental are also unit-level/ / atch-level activities and costs relate to the nu"ber of batches produced/ 7or a car rental fleet& cars at a nu"ber of outlets are probably sent for oil changes or other routine "aintenance in batches/ Car rental co"panies located off-site near an airport usually operate a shuttle service fro" the airport to the rental car location/ *ultiple passengers are usually pic.ed up and dropped off on each run of shuttle/ atch-level costs for the shuttle would include vehicle depreciation& "aintenance& and gasoline& plus the driver=s labor costs/

C/ 5roduct-sustaining activities and costs relate to entire product lines/ 7or a car rental co"pany& the different types of cars for rent could be considered product lines& for e-a"ple econo"y cars& "id-si6ed cars& and so on/ 1r the co"pany "ight see its product lines "ore broadly& such as a product line of cars and a separate line for truc.s/ Advertising and "ar.eting costs are li.ely to be product-line related if the co"pany advertises either truc.s or cars& but not both/ ?/ Custo"er-sustaining activities and costs relate to the different clients/ 0o"eti"es businesses establish a relationship with car rental agencies if e"ployees need to travel by car for business/ ,hese custo"ers "ay require special attention& such as car delivery& or last "inute rentals/ ,he costs of these services are custo"er-sustaining/ :ental co"panies also have progra"s such as the Hert6 D1 Club& where "e"bers receive preferential treat"ent/ 0pecial costs for these progra"s include e-tra personnel to process the rental and par. the vehicle in an easily accessible location/ 2/ 7acility-sustaining costs relate to the facility/ 7or a car rental agency& these could include depreciation and "aintenance of the building and par.ing lots for each outlet/ 7acilitysustaining costs would also include the facility "anager=s salary& electricity and <anitorial service& co"puter ter"inals& and property ta-es/

Chapter 7: Activity- ased Costing and *anage"ent 7/ 1rgani6ation-sustaining costs relate to the entire organi6ation/ ,he C21=s salary& and building lease& rent or depreciation costs at the co"pany=s headquarters are all organi6ation-sustaining costs/ Co"panies such as Hert6 also have large organi6ationwide costs for co"puteri6ed reservation and vehicle inventory syste"s/ 7()/ Cost #oo4s and Cost 5rivers 7 ? A

7-7

A 2 C

*achining (As "achine hours increase& costs such as "aintaining "achines increase! 5urchasing activities (As nu"ber of invoices increases& costs such as wages for e"ployees filling out invoices and supplies used by these e"ployees increase/! 4nspection (As the nu"ber of units produced increases& the nu"ber of units inspected also increases/! Asse"bly (As the nu"ber of parts increases& it ta.es "ore overhead cost in "aterial handling& etc/ to asse"ble the product/! 5ayroll (As nu"ber of e"ployees increases& "ore e"ployee ti"e and supplies are needed to produce paychec.s/! A special quic. free6ing process for food (7ood is usually fro6en in batches/ As the nu"ber of batches increases& costs such as electricity and quic.-free6ing supplies increases/! >aundry in a hospital (As the nu"ber of laundry pounds increases& "ore labor and supplies costs are incurred because "ore batches of clothes are washed/

7()0 6a4der #rod7cts A/ ,otal engineering change cost (+EB'33! ,otal allocated cost for A@(3 (1E1&333F(1E1&333 G 1/)E1&333!E(+E'33! :e"ainder is allocated to A@+3 / ,otal engineering change cost (+EB'33! ,otal allocated cost for A@(3 ((EB'33! :e"ainder is allocated to A@+3 B1&C33 7$3 B1&3C3 B1&C33 1&$33 B +33

7-C

Cost *anage"ent C/ Co"parison of costs allocated under the two syste"s: ,raditional costing A C costing 5roduct Cross 0ubsidi6ation 1vercharge (8ndercharge! 5ercent 1vercharge (8ndercharge! A@(3 B 7$3 1&$33 B ((C3! ((3!H A@+3 B1&3C3 +33 B (C3 C3H ,otal B1&C33 1&C33 B 3

Cross subsidi6ation "eans that one product is allocated "ore overhead cost relative to its use of overhead resources and& therefore& other products= overhead cost is less than their use of resources/ 7(*1 App4e3ood E4ectronics A/ 1/ *anufacturing cost per unit under traditional cost accounting 4n the traditional cost accounting syste"& overhead is allocated to products based on "achine hours/ ,he rate per hour is calculated as follows: ,otal esti"ated overhead 2sti"ated "achine hours: *onarch (C/3 hours - $$&333 units! :egal ((/3 hours - (&333 units! ,otal esti"ated "achine hours 2sti"ated allocation rate per "achine hour (B(&C33&333F1I$&333! B(&C33&333 17+&333 1+&333 1I$&333 B$)/33

,he total "anufacturing cost per unit is the su" of per unit direct "aterial& direct labor& "achine usage& and allocated overhead& as follows: ?irect "aterial ?irect labor *achine usage 1verhead ,otal *onarch B$3C/33 1C/33 1((/33 $33/33 B)73/33 :egal B)C(/33 ($/33 7$/33 133/33 B7IC/33

1/) ?> hrs - B1$ C "ach hrs - B1C C "ach hrs - B$)

'/) ?> hrs - B1$ ( "ach hrs - B1C ( "ach hrs - B$)

$/ *anufacturing cost per unit under A C 7irst& calculate the allocation rate for each of the A C pools: 0oldering 0hip"ents Quality control (BI($&333F1&)73&333 solder <oints! (BC+3&333F$3&333 ship"ents! (B1&$(3&333F77&)33 units inspected! B3/+3 per solder <oint B('/33 per ship"ent B1+/33 per inspection

Chapter 7: Activity- ased Costing and *anage"ent 5urchase orders *achine power *achine setups (BI)3&(33F1I3&3C3 purchase orders! (B)7&+33F1I$&333 "achine hours! (B7)3&333F'3&333 setups!

7-I

B)/33 per purchase order B3/'3 per "achine hour B$)/33 per setup

9e-t& calculate total "anufacturing costs allocated to each product under the A C syste" and then calculate the total "anufacturing cost per unit: *onarchJJJJJJJJJJJ 0oldering 1&1C)&333 solder <ts - B3/+3 B 711&333 0hip"ents 1+&$33 ship"ents - B(' +I+&+33 Quality control )+&$33 inspections - B1+ CII&$33 5urchase orders C3&133 51s - B) (33&)33 *achine power 17+&333 "ach hrs - B3/'3 )$&C33 *achine setups 1+&333 - B$) (33&333 ,otal *anufacturing 1verhead B'&1+3&133 ,otal *anufacturing 1verhead 5er 8nit B'&1+3&133F$$&333 units ?irect "aterial ?irect labor 1/) ?> hrs - B1$ *achine usage C "ach hrs - B1C ,otal *anufacturing Cost 5er 8nit B1('/+( $3C/33 1C/33 1((/33 B)1'/+( :egalJJJJJJJJJJ 'C)&333 solder <ts - B3/+3 B $'1&333 '&C33 ship"ent - B(' 1+'&(33 $1&'33 inspections - B1+ '(3&C33 13I&IC3 51s - B) )(I&I33 1+&333 "ach hrs - B3/'3 (&C33 1(&333 - B$) ')3&333 B1&+'I&I33
B1&+'I&I33F(&333

'/) ?> hrs - B1$ ( "ach hrs - B1C

B (3I/IC )C(/33 ($/33 7$/33 B1&137/IC

/ ,he traditional costing syste" allocates a lu"p su" of overhead based only on "achine hours& while the A C syste" uses si- cost pools to allocate the overhead/ Allocations using these cost pools and cost drivers "ore accurately reflect the flow of resources/ C/ 1/ 1perating profit per unit under traditional cost accounting: Monarch Selling Price $ 900.00 Manufacturing ()73/33! Selling, General, and Administrative (265.00) Traditional costing operating profit $ 65.00 $/ 1perating profit per unit under A C: Selling Price Manufacturing Selling, General, and Administrative ABC costing operating profit ?/ Monarch $900.00 ()1'/+(! (265.00) $121.36 Regal $1,140.00 (1&137/IC! (244.50) $ (212.48) Regal $1,140.00 (7IC/33! (244.50) $ 97.50

ased on the profit infor"ation using A C& Applewood should concentrate on the *onarch/ 8nder A C& it appears that the organi6ation incurs a loss for each unit sold of

7-13 Cost *anage"ent :egal/ 8sing this A C infor"ation would definitely affect the reco""endation because one product appears to have a negative profit "argin/ Note: ,his proble" is fro" an old C*A e-a"/ ,he calculations shown in this proble" probably include fi-ed costs/ :e"e"ber fro" Chapter ( that organi6ations need to e"phasi6e the product with the highest contribution "argin to "a-i"i6e profitsK however& that product cannot be identified with the infor"ation given in this proble"/ Applewood would need to separate costs into fle-ible (those that vary with activity! and co""itted (those that do not vary with activity! to deter"ine the A C contribution "argin for each product/ 1nce this is done& the product with highest contribution "argin can be identified and e"phasi6ed/ 7(*) #a4mer Company A/ Manufacturing cost per unit: *achine setup *aterial handling *achining Asse"bly 4nspection ?irect "aterials ,otal Costs Cost 5er 8nit / 7ull cost per unit Total manufacturing cost per unit Research and marketing costs per unit Other non-manufacturing costs per unit Total full cost per unit C/ Cost savings required: 7irst& calculate the "a-i"u" full cost that would allow the co"pany to achieve a profit of 13H based on full cost: 0elling price L 7ull Cost G 13H - 7ull Cost B+)3/33 L 133H - 7ull Cost G 13H - 7ull Cost B+)3/33 L 113H - 7ull Cost 7ull Cost L B+)3/33F113H 7ull Cost L B)I3/I1 $188 140 320 $648 $ setups - B)3/33 1I parts - B3/)3 - 133 units 1/$) "achine hours - B$+/33 - 133 units 1/) direct labor hours - B$$/33 - 133 units 133 units - B1$/33 133 units - B133/33 B1C&C33F133 units B 133 I)3 '&$)3 '&'33 1&$33 13&333 B1C&C33 B1CC

Chapter 7: Activity- ased Costing and *anage"ent 7-11 9e-t& calculate the difference between the "a-i"u" full cost calculated above and the current full cost/ ,his is the a"ount of cost savings required to achieve the desired profit/ 7ull cost per unit 7ull cost needed to achieve desired profit Cost savings required 7(** 6estra4 Man78act7ring A/ 7ollowing are the A C allocation rates: Activity *achine set-up *aterial handling 5roduct design 9u"ber of inspection Cost B (3&333 1+3&333 133&333 $+3&333 B)+3&333 Activity level (33 1+&333 $&333 1'&333 Allocation rate B133 B13 B)3 B$3 B+(C/33 )I3/I1 B )7/3I

7or <ob ($& overhead costs L ($-B133!G(+3-B13!G ((3-B$3! G($3-B)3! L B$&+33 / 7or <ob ('& overhead costs L ((-B133!G($3-B13!G($3-B$3!G(133-B)3! L B+&333 C/ 9on-value added activities are tas.s or functions that are unnecessary and waste resources because they do not increase the worth of an organi6ation=s goods or services to custo"ers/ At Mestral& non-value-added activities include "oving "aterials fro" place to place (such as fro" receiving doc. to warehouse to one wor. area and then to another wor. area!/ ,he co"pany could reduce costs by "ini"i6ing the handling of "aterials/ Another non-value-added activity is inspection/ %ith sufficient quality i"prove"ents and continuous inspection by wor.ers during production processes& the need for a separate inspection process can be reduced or eli"inated/ 0et-up costs are also considered non-value added and the set-up activity could be analy6ed to reduce steps and "aterials if possible so that costs are reduced/ 7(*+ E4ite 5aycare NNote about problem complexity: 5art A is coded as 2-tend rather than 0tep ' because a "ore co"ple- proble" involving a si"ilar organi6ation was illustrated as a self-study proble" in the chapter/O A/ ,here are several cost ob<ects that could be chosen for 2lite ?aycare& depending on the planned use of infor"ation/ ,he director "ay want to develop a function for total costs of the daycare for budget or bench"ar.ing purposes/ 4n that case& the cost ob<ect is the daycare itself/ Alternatively& she "ight choose the type of service (full-ti"e or part-ti"e! as the cost ob<ect/ 4f she wanted to better understand the cost per child& she could choose

7-1$ Cost *anage"ent a per-child cost ob<ect/ ,his proble" focuses on the daycare cost function& so the cost ob<ect is the daycare progra"/ 9e-t& cost pools need to be developed/ 7or 2lite ?aycare& there appear to a nu"ber of different activities: greeting and leaving& preparing and serving food& supervising naps& supervising recreation& and activity ti"e/ ,he greeting and supervising activities can probably be co"bined into one cost pool/ However& supplies are probably used during activity ti"e& and the director "ay want to .now an appro-i"ate cost per child for activity ti"e/ ,herefore& a single pool can be used for greeting& supervising naps& and recreationK a pool for supervising activitiesK and another pool can be used for "eal-related activities (preparing and serving food& "onitoring behavior!/ 9e-t& cost drivers for each pool need to be chosen/ Cost drivers for greeting and supervising activities could be nu"ber of children or ti"e spent/ ecause supervising naps and recreation activities are si"ilar to greeting& cost driver choices would be si"ilar for these two pools/ A nu"ber of different children can be supervised at one ti"e& so ti"e spent would be probably be easiest to trac. and provide an appropriate accounting of costs related to supervising activities/ Cost drivers for preparing and serving food could be either the nu"ber of "eals served or the nu"ber of children served/ ,rac.ing "eals served is probably <ust as easy as trac.ing nu"ber of children& but "eals are "ore closely related to food preparation& so nu"ber of "eals served will be used as the cost driver/ Cost drivers for supplies could be nu"ber of art activities or nu"ber of children& a"ong others/ 4t would be easiest to trac. nu"ber of children& and it is li.ely that each child uses si"ilar a"ounts of supplies/ / Annual cost per child ,he percentage of ti"e for the greeting and supervising pool is '3H ($3HG13H!& $3H for "eal-related activities& and )3H for supervising educational activities/ ,hese ti"es can be further categori6ed into full-ti"e and after-school by considering the percentage of total hours each progra" uses/ ,here are 13 hours available per full-ti"e child& and ' hours per child after school/ ,herefore& there are '33 (13 hours - '3 children! full-ti"e child hours available per day and '3 (' hours - 13children! after-school child hours available/ 1f the total ''3 hours available& I1H ('33F''3! of the hours are full-ti"e child hours& and IH are after-school child hours/ 9ow the calculation of the A C "eal related activities cost requires several steps& as follows: 2sti"ated annual volu"e of snac.sF"eals: (Assu"e ) days per wee. - )3 wee.s L $)3 days! 7ull-ti"e ('3 children - ' snac.s P "eals - $)3 days! After-school (13 children - 1 snac. - $)3 days! 9u"ber of "eals served

$$&)33 $&)33 $)&333

Chapter 7: Activity- ased Costing and *anage"ent 7-1' ,otal food cost ,i"e spent on "eal preparation ($3H - B133&333! ,otal snac.s and "eals per year 2sti"ated cost per snac.F"eal (B(3&333F$)&333! ,he total annual A C cost per child is calculated as follows: 7ull-,i"e 0nac.sF"eals: 7ull-ti"e (' snac.sF"eals - $)3 days - B1/+3! B1&$33 After-school (1 snac.F"eal - $)3 days - B1/+3! 0upplies: 7ull-ti"e (B13&333F'3 children! After-school (BC&333F13 children! 0upervising educational activities: 7ull-ti"e ()3H - I1H - B133&333!F'3 After-school ()3H - IH - B133&333!F13 0upervising naps& recreation& and greeting: 7ull-ti"e ('3H - I1H - B133&333!F'3 After-school ('3H - IH - B133&333!F13 ,otal Annual Cost 5er Child ''' C33 1&)17 ()3 I13 JJJJJJ B'&I+3 B$3&333 $3&333 B(3&333 B1/+3 After-0chool B (33

$73 B1&I$3

C/ ,he e"ployees wor. with both full-ti"e and after-school children& and there are uncertainties about how "uch ti"e they spend with each type of student/ 4f the two groups of children are co"bined for so"e activities& then any allocation of salaries or wages to each service is arbitrary and unli.ely to reflect the two services= use of e"ployee ti"e/ 4f the two services are co"pletely separate& the cost of salaries and wages can be traced directly to the service/ However& for activities such as snac.s& so"e e"ployee ti"e is probably spent preparing snac.s for both groups at once& and allocating this cost would be an uncertain and arbitrary process/ 4t is i"possible for e"ployees to trac. e-act ti"e spent per service for activities underta.en for both services& such as snac.s and possibly "eeting parents at the end of the day/ ,here are uncertainties about whether allocation bases reflect the use of resources because these are fi-ed resources& and the cost does not vary proportionately with any type of volu"e "easure/ ,herefore& any allocation is arbitrary and will not accurately reflect use of those fi-ed resources/ 7(*, ABM NNote about problem complexity: 4te" C is coded as 0tep 1 instead of 0tep ' because the chapter e-plicitly discusses "ethods for i"proving custo"er profitability/O A/ Activity-based "anage"ent involves the use of A C cost infor"ation to develop a co"parison of the costs and benefits of tas.s and procedures underta.en within the

7-1( Cost *anage"ent organi6ation to identify i"prove"ents that can be "ade in quality and efficiency or cost reductions/ / A high-cost custo"er is one for who" contribution "argin is low& relative to other custo"ers& but who requires costly services such as special custo"i6ed products& special shipping procedures& s"all production and delivery quantities& speciali6ed post-sales service& or custo"er services before purchasing& and so on/ >ow-cost custo"ers would provide relatively "ore contribution fro" their orders with little special treat"ent/ ,hese custo"ers "ay order large quantities of regular products and not require any special delivery or help before or after the sale/ C/ ,here are "any possible ways to write this paragraph& and the wording depends on the assu"ptions that are "ade about the particular audience for the paragraph& the custo"er& and the nature of the co"pany=s business/ elow is a sa"ple paragraph/ 0everal approaches can be ta.en to i"prove profitability for high-cost custo"ers/ Accountants can identify costs for these types of custo"ers& and the co"pany can negotiate with each custo"er to either charge for so"e of the speciali6ed services or "otivate the custo"ers to reduce the a"ount of costly services required/ %ays to reduce costs include i"proving the predictability of orders& reducing the a"ount of engineering changes or other product changes required& and finding standard products that "ight substitute for custo"i6ed products/ Custo"ers requiring large a"ounts of technical support following a purchase "ight be willing to pay for this service/ 7(*- Ne3-Rage Cosmetics A/ 1/ Quality control cost per order using A C 4nco"ing "aterial inspection 4n-process inspection 5roduct certification ,otal quality control costs Quality control cost per order 1$ types of "aterial - B11/)3 17&)33 units - B3/1( $) orders - B77/33 B(&)1'/33F$) orders B 1'C/33 $&()3/33 1&I$)/33 B(&)1'/33 B1C3/)$

$/ Quality control cost per order using traditional cost accounting ,otal quality control costs assigned L ?irect labor costs - 1(/)H L B$7&)33 - 1(/)H L B'&IC7/)3 Quality control cost per order L B'&IC7/)3F$) orders L B1)I/)3

Chapter 7: Activity- ased Costing and *anage"ent 7-1) / 8nder the A C syste"& the costs are "ore related to the resources used to insure quality control/ ,hese costs are pri"arily product inspection and certification costs& and the allocated costs change as the types of "aterials and nu"ber of units inspected change/ 8nder traditional cost accounting& direct labor costs "ay be related to nu"ber of units inspected if it ta.es "ore labor to produce "ore units& but in auto"ated "anufacturing settings this is not always the case/ 4n addition& direct labor costs are not related to types of "aterials/ ,herefore& using direct labor costs to assign quality costs provides poor quality infor"ation about the variation in quality control costs a"ong different orders/ Accordingly& the A C syste" provides "ore accurate costs for quality control/ 7(*. &7a4ity Activities 5lease see 2-hibit 7/+ for "ore details about these answers/ JJJAJJJ 1 JJJ5JJJ $ JJJ50JJ ' JJJ5:JJ ( JJJ50JJ ) J5 or AJ + (8sed to "otivate e"ployees to i"prove quality& also requires appraisal! JJJ5:JJ 7

7-1+ Cost *anage"ent

#ROBLEM"
7(*7 "teps in ABC A/ ' ( + 1 $ ) 4dentify and su" the costs into activity-based cost pools Choose a cost driver for each activity 7or each A C cost pool& allocate overhead costs to the product or service 4dentify the relevant cost ob<ect 4dentify the activities necessary for production or service delivery 7or each A C cost pool& calculate a cost allocation rate

/ All of these steps include uncertainties/ After a cost ob<ect is chosen& uncertainty e-ists about whether all of the activities necessary to produce the good or service are identified/ 0o"e activities "ay be overloo.ed& or the set of activities "ay include ones that rarely occur and would be an i""aterial part of the process/ 4n addition& uncertainties e-ist about the opti"al nu"ber of activities for a given cost pool/ ,here is uncertainty about whether the costs for developing additional cost pools would e-ceed the benefits/ 8ncertainties also e-ist about whether the syste" would be "ore or less accurate when potentially separate activities are grouped together/ %hen assigning costs to activities& there is uncertainty about whether all direct costs have identified and traced to each activity/ 7or e-a"ple& supplies such as cloths used to wipe off e-cess oil during the set-up process "ay be overloo.ed/ 4n addition& the assign"ent of a co""on resource cost& such as a supervisor salary& "ay not reflect the ti"e the supervisor spends on different activities/ 7or each cost pool& there is uncertainty about whether all of the potential cost drivers have been identified and whether the chosen cost driver "ost accurately reflects the use of resources within that cost pool/ 4n addition& so"e activities are interdependent& and the cost pools and cost drivers "ay not accurately reflect these interdependencies/ Choosing a cost driver for each activity requires the use of <udg"ent/ 0o"e activities "ay have an obvious cost driver& while others could have several different drivers/ Asse"bling a bo-& for e-a"ple& "ay only require direct labor and thus have a clear cost driver/ 1ther activities could include adding "aterials& using "achine hours& and using direct labor hours/ 7or these types of activities& several different cost drivers could be chosen/ ,he accountant i"ple"enting A C "ust identify the driver that best relates changes in activities to changes in cost/ *easuring the a"ount of cost driver used per product is so"eti"es uncertain/ 0uppose ti"e spent cleaning is a cost driver for a house.eeping cost pool/ %hen a new e"ployee is hired& the actual ti"e "ay be longer than the nor"al ti"e for the e"ployee=s first several "onths/ ,herefore& uncertainty e-ists about whether the allocation base volu"e

Chapter 7: Activity- ased Costing and *anage"ent 7-17 is accurately set& or whether the activity has been correctly "easured when allocating the cost/ C/ ,here are "any correct choices for this answer/ ,he .ey is to focus on uncertainties and to e-plain why the need for <udg"ent "ight be greater in one step than in the others/ elow are two sa"ple answers/ ,he choice of cost drivers "ight require the greatest use of <udg"ent because of the large nu"ber of uncertainties involved/ ,here are uncertainties about whether all possible cost driver choices have been identified& and whether the selected cost driver actually reflects the use of resources of the cost pool "ore accurately than other choices/ 4n addition& so"e high quality cost drivers "ay not be "easured very accurately& there are certainties about whether a particular cost driver provides the best infor"ation/ ,he choice of activity cost pools "ight require the greatest use of <udg"ent because it not only involves a large nu"ber of uncertainties (as discussed in 5art above!& but it also affects all of the re"aining steps/ Choices that are "ade about the activities influence the cost and benefits achieved fro" the entire syste"/ 7(*/ ABC Cost 2ierarchy A/ A cost hierarchy in A C divides activities into si- levels: unit& batch& product& custo"er& facility& and organi6ation/ ,his allows accountants to "ore carefully identify activities and their associated costs at all levels within the co"pany/ / 7ollowing are several reasons for uncertainty in classifying costs into the cost hierarchy categoriesK students "ay thin. of others/ As costs are categori6ed into cost hierarchy categories& accountants "ight not co"pletely understand the interdependencies within a group of activities/ 7or e-a"ple& costs that appear to be batch-level costs could also be affected by the nu"ber of units or the weight of the batch/ *anagers cannot be certain that the chosen cost driver in a specific cost category independently reflects cost changes/ Additionally& costs that appear to be organi6ation-level costs could be driven by changes in volu"es/ 7or e-a"ple& the costs of billing and interacting with custo"ers regarding their bills could increase step-wise as a fi-ed cost/ Accountants are uncertain whether this cost increases as the nu"ber of custo"ers increase& or whether it is an organi6ationlevel cost that will not change regardless of volu"es/ C/ ?ividing costs into si- levels helps accountants better identify all aspects of costs in a co"pany/ ,hin.ing about a particular level helps accountants focus on activities that occur at that level/ 4n addition& once activities have been developed for a particular level& it beco"es easier to .now how costs change with volu"es of activity/ 7or e-a"ple& property ta-es are a facility-level cost and therefore would not increase based on the nu"ber of batches produced& but only on the value of the building itself/ 8sing these silevels helps accountants better "ap resource usage to products and services/

7-1C Cost *anage"ent 7(*0 !ines Corporation A/ 5er unit cost using the old "ethod: ?irect "aterials ?irect labor 4ndirect ,otal @ob 1rder (13JJJJJJJJ BI&733F13 units B I73/33 B7)3F13 units 7)/33 B11)-($) hrsF13 units! $C7/)3 B1&''$/)3 @ob 1rder (11JJJJJJJJ B)I&I33F$33 units B$II/)3 B11&$)3F$33 units )+/$) B11)-('7) hrsF$33 units! $1)/+' B)71/'C

/ Cost per unit cost using A C @ob 1rder (13JJJJJJJ *aterial handling )33 parts - B3/(3 B $33/33 *illing 1)3 "ach hrs - B$3 '&333/33 Arinding )33 parts - B3/C3 (33/33 Asse"bly $ asse"bly hrs - B) 13/33 4nspection 13 units - B$) $)3/33 0hipping 1 order - B1&)33 1&)33/33 ?irect "aterial I&733/33 ?irect labor 7)3/33 ,otal costs for order B1)&C13/33 ,otal cost per unit B1)&C13/33F13 units B1&)C1/33 @ob 1rder (11JJJJJJJJ $&333 parts - B3/(3 B C33/33 1&3)3 "ach hrs - B$3 $1&333/33 $&333 parts - B3/C3 1&+33/33 '3 asse"bly hrs - B) 1)3/33 $33 units - B$) )&333/33 1 order - B1&)33 1&)33/33 )I&I33/33 11&$)3/33 B131&$33/33 B131&$33/33F$33 units B)3+/33

C/ 4n the traditional costing syste"& the indirect costs were co"bined into a single cost pool and then allocated based on direct labor hours used by each order/ ?irect labor hours "ay or "ay not be related to costs in the overhead pool/ 4t=s unli.ely that they are related to a very large portion of those costs/ However& under A C& the indirect costs are divided into si- cost pools and allocated using cost drivers that are "ore li.ely to reflect the use of resources/ ,herefore& the cost allocations provide "ore accurate infor"ation about costs/ ?/ ,here are "any uncertainties about the choice of cost driver for each activity-based cost pool/ ,here "ay be several different drivers that could be used& and several of the" could be si"ilar in their ability to relate cost to the activity/ 7or e-a"ple& if a school has classroo"s that are si"ilar in physical si6e with si"ilar nu"bers of students in each class& nu"ber of roo"s "ay be an adequate cost driver/ However& if younger students are "essier and cleaning their roo"s ta.es longer& then ti"e spent "ight be a better cost driver/ 0o"eti"es ti"e spent is not "easured/ 4n this case nu"ber of roo"s could be used& or square feet if roo"s are different si6es/ And this is a fairly forthright activity with easy to identify cost drivers/ 1ther activities can be "uch "ore co"ple-& and finding cost drivers can be "ore difficult/ 4dentifying the "ost appropriate cost driver requires effort& and the best driver "ay be e-pensive to "easure/ 4f the activity changes in any way& a new driver "ight be needed/ 2/ An A C syste" allocates costs using "ore cost pools and "ore appropriate cost drivers& so costs are li.ely to be less distorted/ 7or e-a"ple& if direct labor hours were

Chapter 7: Activity- ased Costing and *anage"ent 7-1I abnor"ally high for one <ob& under the traditional costing syste" the indirect costs assigned to that <ob would be higher even if "ore costs were not incurred/ 8nder A C this possibility for error is "ini"i6ed because there are "ore allocation bases than direct labor hours/ ,he A C syste" is "ore costly to i"ple"ent because it ta.es ti"e to develop and "any e"ployees need to be involved/ A C is "ore useful in analy6ing operations to i"prove quality and reduce costs/ 9on-value added activities can be identified and other activities can be si"plified& once they have been identified/ ,his doesn=t tend to happen with traditional costing/ 7(+1 6im Mi44s A sa"ple spreadsheet showing the solutions for this proble" is available on the 4nstructor=s web site for the te-tboo. (available at www/wiley/co"FcollegeFeldenburg!/ A/ 1P$ 7ollowing are e-cerpts fro" a sa"ple spreadsheet for this proble"/

Inp7t Area ?eni" ?irect Costs: ?irect "aterials ?irect labor cost 1verhead Costs: *achine 0etup 4nspection ,otal 1verhead Qolu"es: 8nits ?irect labor hours *achine hours 9u"ber of set-ups 4nspection hours BC&333 B++3 >ight-%eight Cotton B$(&333 B1&'$3 Heavy-%eight Cotton B$3&333 BI$3 ,otal B)$&333 B$&I33

B(3&333 B11&333 B+&II+ B)7&II+

1&333 '' )33 13 C'/'

(&333 ++ 1&''' '3 '''/'

$&333 (+ 1&)33 $3 1++/+

7&333 1() '&''' +3 )C'/$

7-$3 Cost *anage"ent

RA5I IONAL #ROCE"" CO" ING
9ote: ecause there are no beginning or ending inventories& equivalent units are equal to physical units/ Also& there is no need to calculation conversion cost per unit separately for the two depart"ents because conversion costs are allocated in both depart"ents to the nu"ber of bolts produced/ %ith no beginning or ending inventories& the nu"ber of bolts produced is identical in the two depart"ents/

E97iva4ent Conversion Cost #er 'nit

,otal Conversion Costs to Account for: ?irect labor 1verhead ,otal ,otal 8nits ( olts! to Account for 2quivalent Conversion Cost 5er 8nit ,otal B$&I33 B)7&II+ B+3&CI+ 7&333 BC/+II(' ?eni" 1&333 BC&333 BC&+II B1+&+II >% Cotton (&333 B$(&333 B'(&7IC B)C&7IC H% Cotton $&333 B$3&333 B17&'II B'7&'II ,otal 7&333 B)$&333 B+3&CI+ B11$&CI+

#rocess Cost Report

9u"ber of bolts ?irect "aterials Conversion costs ,otal Costs Accounted for 0u""ary of Cost 5er 8nit: ?irect "aterials Conversion costs ,otal

BC/33 BC/73 B1+/73

B+/33 BC/73 B1(/73

B13/33 BC/73 B1C/73

/ 5rocess Costing Activity- ased Costing Cost 5er olt 1verstated (8nderstated by ,raditional 5rocess Costing ?eni" B1+/73 17/(I B (3/7I! >ight-%eight Cotton B1(/73 1$/73 B $/33 Heavy-%eight Cotton B1C/73 $$/$I B ('/)I!

8nder process costing& the cost per bolt of light-weight cotton was overstatedK it absorbed costs incurred by deni" and heavy-weight cotton because costs under process costing are allocated to the depart"ent and then to the product/ ,he production volu"e of lightweight cotton ((&333 bolts! is "uch larger than either deni" (1&333 bolts! or heavy weight cotton ($&333 bolts!/ %hen conversion costs are allocated based on nu"ber of units rather than based on the flow of resources used& the product with the "ost units is allocated relatively "ore cost/ ,he production of light-weight cotton requires proportionately fewer set-ups than the other two products& so it should be allocated less of the cost for set-up/ >ight-weight cotton also uses proportionately fewer "achine hours& and so it should also be allocated less of the "achine activity costs/ 4n addition& lightweight cotton uses less direct labor per bolt than the other two products/ 8nder traditional process costing& direct labor is co"bined with other conversion costs and is allocated to units without regard to the actual labor used/

Chapter 7: Activity- ased Costing and *anage"ent 7-$1 C/ *anagers "ay want to investigate "achine set-up costs and reduce the"& or reduce the nu"ber of set-ups required for all products/ 4n addition& perhaps inspection activities could be analy6ed and costs reduced/ ,he "anagers "ight also investigate reasons why light-weight cotton uses significantly less direct labor than the other two products/ 5erhaps direct labor could be used "ore efficiently& reducing the direct labor cost/ 7(+) he #ond 6it Company

A/ ,otal Cost 5er atch: *aterial handling 7or"ing *olding setup 5ac.ing and shipping 4nspection ?irect labor ?irect "aterials ,otal costs $3 parts - B1 per part - 13 .its $ "olding hours - B(3 per hour - 13 .its 1 batch - B)3/33 '3 pounds - B1/'3 per pound - 13 .its B13 per .it - 13 .its B$3 per .it - 13 .its B133 per .it - 13 .its B $33/33 C33/33 )3/33 'I3/33 133/33 $33/33 1&333/33 B$&7(3/33

/ ,otal budgeted cost per .it L ,otal budgeted cost per batch F 9u"ber of .its per batch L B$&7(3/33 F 13 .its L B$7(/33 per .it C/ Cost per Mit Cost 5er atch (13 .its per batch! $2,740 $274.00 15 1.50 25 2.50 $2,780 $278.00

Total Cost from Parts A and B Marketing ($15,000/1,000 batches) Customer Service ($25,000/1,000 batches) Total

?/ ,here are other potential activities that could be chosen for this co"pany/ 0o"e activities could be separated further into "ore pools/ 7or e-a"ple& pac.ing and shipping could be separated into a pac.ing activity and a shipping activity/ *olding "ay consist of several different tas.s that could be considered separate activities/ Alternatively& so"e of these cost pools could possibly be co"bined& such as "olding setup and for"ing/ ,here are "any different choices that could be "ade for these activities/ 2/ ,he new A C syste" can lead to identification of non-value-added costs by focusing "anager attention on the organi6ation=s activities and cost drivers/ As activities are analy6ed& so"e tas.s or procedures in these activities "ight be identified as non-value added& and then eli"inated/ 7or e-a"ple& if the ponds could be redesigned to require fewer parts& "aterial-handling costs would li.ely be reduced/ 4f specific types of defects cause inspection ti"e to increase& redesigning parts or processes to eli"inate the defects would decrease inspection ti"e and also decrease custo"er service costs for product

7-$$ Cost *anage"ent failures/ ,he pac.ing and shipping activities could be analy6ed to deter"ine whether steps could be co"bined or so"e tas.s eli"inated or outsourced at lower cost/ ,here are "any other non-value activities that students "ight have identified/ 7(+* 5ata #rocessors A/ ,hese activities are not the only possible set/ 2ach of these activities could be separated into a nu"ber of other activities/ 7or e-a"ple& the activity of issuing new credit cards could be further separated into the following cost pools: Qerifying authori6ation of new credit cards to be issued *ailing new credit cards Qalidating new credit cards (before first use of the card!

2ach cost pool could be disaggregated into "ore cost pools/ Alternatively& so"e of these cost pools could be aggregated in so"e organi6ations/ / Activity 2sti"ated Cost ,ransaction processing B$&333&333 0tate"ents 1&333&333 9ew credit cards )33&333 illing disputes I3&333 2sti"ated Activity )&333&333 $)3&333 133&333 '&333 :ate B 3/(3 (/33 )/33 '3/33

C/ ,he volu"e of activities cannot be predicted with certainty fro" one "onth to the ne-t/ 7or e-a"ple& although the nu"ber of credit cards issued last period is .nown& econo"ic changes affect the nu"ber of people who will apply& as will advertising ca"paigns and co"petition a"ong financial institutions/ 0o"e activities& such as issuing "onthly state"ents& are easier to esti"ate than other activities& such as resolving billing disputes/ ,he nu"ber of custo"ers holding credit card accounts probably re"ains so"ewhat constant& although each "onth so"e credit card custo"ers are gained and lost/ 4t is "ore difficult to predict the nu"ber of billing disputes& which fluctuate with the volu"e of transactions and also with the degree of proble"s such as fraudulent credit card use& retailer errors& and charges for unsatisfactory goods or services/ Costs will be different than e-pected because it is not possible to perfectly predict future costs/ ,here "ay be unanticipated changes in prices& such as electricity rates& telephone charges& or e"ployee health care costs/ 4f activity volu"es are higher than e-pected& then e"ployee overti"e pay "ay e-ceed e-pectations/ 4nfor"ation technology progra""ing and operating costs "ay be higher or lower than e-pected/ 7or e-a"ple& there could be fewer proble"s than e-pected when "a.ing i"prove"ents to the transaction processing syste"/ ,here are also li.ely to be rando" fluctuations in costs such as office supplies/ ?/ 5ractical capacity is the "a-i"u" capacity under typical operating conditions& ta.ing into account regularly scheduled holidays and other down ti"e/ ,his co"pany has

Chapter 7: Activity- ased Costing and *anage"ent 7-$' several different types of capacity/ ,he discussions below address three types of capacityK students "ay thin. of others/ 1ne type of capacity for ?ata 5rocessors is the capacity of the co"puteri6ed technology to process transactions/ ecause transactions occur at any ti"e and anywhere in the world& this capacity "ust operate $( hours per day& '+) days per year/ ,he capacity li"it would be "easured in ter"s of the "a-i"u" volu"e of transactions that could be processed/ ,he practical capacity of the co"puteri6ed technology for transaction processing is al"ost certainly higher than the esti"ated activity level/ ,he co"pany=s contracts with its custo"ers probably include guarantees that the syste" is capable of processing a higher volu"e of transactions than e-pected/ 4n addition& the co"pany probably has bac.-up RhotS sites that are fully operational and can ta.e over processing in the case of syste" failure due to technological proble"s& natural disasters& terrorist attac.s& etc/ Capacity for ?ata 5rocessors also includes the e"ployee capacity to handle services such as billing disputes/ ,his type of practical capacity is li.ely to be higher than esti"ated activity levels during slow ti"es& but it could be lower when activities are une-pectedly high/ However& the co"pany probably has contractual co""it"ents to resolve billing disputes within a "a-i"u" nu"ber of days/ ,hus& the co"pany "ust be capable of e-panding its e"ployee practical capacity& as needed& to "eet actual activity levels/ ,he co"pany "ay be able to e-pand this capacity quic.ly by using e"ployee overti"e or te"porary labor/ Another type of capacity for ?ata 5rocessors is the physical capacity for printing and "ailing "onthly state"ents/ 1nce again& the co"pany is probably contractually co""itted to perfor"ance of this service in a ti"ely "anner& so the co"pany "ust have sufficient capacity to handle higher than e-pected volu"e/ ecause it "ay be difficult to quic.ly e-pand this type of physical capacity& the co"pany=s practical capacity is probably higher than its e-pected activity level/ 7(++ "teps in ABC A/ Aovern"ent agencies use cost infor"ation to evaluate and i"prove the efficiency of their services/ *ost agencies rely on support through a budgeting process& and i"proving their efficiency helps the" obtain operating funds/ 4n addition& "anagers "ay want to "ove up in the organi6ation=s ran.s& and infor"ation about their effectiveness is found through cost reports and budgets/ Aovern"ents are also interested in i"proving their cost syste"s because of their stewardship responsibility/ ,hey are responsible for efficiently using public funds and "a-i"i6ing constituent benefits/ / 7ollowing are the five steps listed in the handboo.: 1/ Analy6e Activities $/ Aather Costs '/ ,race Costs to Activities (/ 2stablish 1utput *easures )/ Analy6e Costs

7-$( Cost *anage"ent

7ollowing are the si- steps listed in the te-tboo.: 1/ 4dentify the relevant cost ob<ect $/ 4dentify activities '/ Assign (trace and allocate! costs to activity-based cost pools (/ 7or each A C cost pool& choose a cost driver )/ 7or each A C cost pool& calculate an allocation rate E Allocation :ate L Activity CostFQolu"e of Cost ?river +/ 7or each A C cost pool& allocate activity costs to the cost ob<ect E Allocation L Allocation :ate E Actual Qolu"e of Activity ,he handboo. does not have a step to identify the relevant cost ob<ect/ ,herefore& step $ fro" the te-tboo. is si"ilar to step 1 in the handboo./ ,he te-tboo. has no step to gather costsK the te-tboo. assu"es that costs are gathered/ 0tep ' fro" the handboo. is si"ilar to step ' in the te-tboo. (traces and allocate costs to cost pool!/ 0tep ( is si"ilar in both "ethods& although the language used is different/ 0tep ) in the handboo. is very general while& steps ) and + in the te-tboo. cover the sa"e processes& but in "ore detail/ 7(+, Je88erson Co7nty Anima4 "he4ter A/ ,he staff "e"ber identified the following three cost ob<ects/ 2ach cost ob<ect represents one of organi6ation=s three services/ Ani"al shelter 1bedience training Qeterinarian services 1ne possibility for cost pools is to create one pool for each cost ob<ect/ ,his approach assu"es that all costs can be directly assigned to one of these three services/ ased on the following su""ary& it appears that so"e of the costs can be directly traced to the cost ob<ects/ However& so"e of the costs are indirect/ (9ote: @udg"ent is involved in these classificationsK students "ight have categori6ed costs differently/ 7or e-a"ple& students "ight have classified veterinarians and technicians as indirect if they assu"ed that these e"ployees provide services for the ani"al shelter in addition to the veterinarian clinic/!
Ani"al 0helter B 3 133&333 3 $3&333 )3&333 3 B173&333 ?irect CostsJJJJJJJJJJJ 1bedience Qeterinarian ,raining 0ervices 4ndirect B 3 B 3 B +3&333 3 3 3 3 1)3&333 3 $3&333 3 3 3 7)&333 3 3 3 $33&333 B$3&333 B$$)&333 B$+3&333

?irector and staff salaries Ani"al shelter e"ployees= salaries Qeterinarians and technicians Ani"al trainersE 7ood and suppliesEE uilding-related costs ,otal

,otal B +3&333 133&333 1)3&333 (3&333 1$)&333 $33&333 B+7)&333

E ,he proble" indicates that ani"al trainers provide training classes and also train ani"als housed in the ani"al shelter/ )3H of the ani"al trainer ti"e is devoted to

Chapter 7: Activity- ased Costing and *anage"ent 7-$) obedience classes/ ,he re"aining )3H is assu"ed to relate to training for ani"als housed in the ani"al shelter/ EE ,he proble" states that B7)&333 of this cost is used by the veterinary clinic/ ,he re"ainder (B)3&333! is assu"ed to be used in the ani"al shelter/ A decision "ust be "ade about whether to allocate the two indirect costs to the three services/ R?irector and staff salariesS is "ost li.ely a facility-level cost for general ad"inistration& which would 91, nor"ally be allocated to individual product lines/ R uilding-related costsS is also a facility-level cost/ 0o"eti"es this type of cost is allocated to individual products& and so"eti"es it is not/ ,he following solution assu"es that the building-related costs are 91, allocated to the shelter=s individual services/ / ,here are three cost pools to considerTone for each of the organi6ation=s services/ 7or the ani"al shelter& a cost driver could be the nu"ber of ani"al days/ 1n a daily basis& each ani"al would require si"ilar ti"e fro" e"ployees to clean their cages& feed& and groo"& and si"ilar supplies such as food and bedding/ Another possible cost driver is the total nu"ber of ani"als housed/ However& this cost driver would not capture differences in cost caused by lengthy ani"al stays/ A cost driver for obedience training could be nu"ber of classes& nu"ber of fa"ilies ta.ing classes& or nu"ber of wee.s in which classes are held/ ecause each class would require about the sa"e a"ount of ti"e regardless of the nu"ber of fa"ilies per class& nu"ber of classes is probably a better cost driver/ A cost driver for veterinary services could be the nu"ber of ani"al-visits/ 0i"ilar a"ounts of ti"e and resources would be used per ani"al& although this assu"es that the product "i- of (e/g/& neutering and vaccinations! re"ains relatively constant/ C/ Aiven the cost pools identified in part A and the cost drivers in part & the allocation rates are as follows: Allocation Cost 5ool ,otal Cost Cost ?river Qolu"e :ate Ani"al shelter B173&333 Ani"al days $7&'7) B +/$1 1bedience training $3&333 D of classes 1$) 1+3/33 Qeterinarian services $$)&333 Ani"al visits )&333 ()/33 ,he allocation rate for the ani"al shelter indicates that the average cost of housing a pet for one day is B+/$1/ ,he allocation rate for obedience training indicates that it costs on average B1+3 to offer a training class/ ,he allocation rate for veterinarian services indicates that it costs on average B() to provide veterinarian care per ani"al-visit/

7-$+ Cost *anage"ent ?/ 1/ Quality activities include: E Prevention activities perfor"ed to insure defect-free production E Appraisal activities perfor"ed to identify defective units E Production activities underta.en in the production or rewor. of failed units E Post-sales activities underta.en after the product has been sold to re"edy proble"s caused by defects and failed units ,he shelter is e-periencing a post-sales activity when ani"als are returned because of behavior proble"s/ $/ 9o& the current A C syste" does not include cost pools related to any of the types of quality activities listed in 5art 2/1 above/ 7or e-a"ple& the syste" does not trac. the cost of training dogs while they are housed in the ani"al shelter (prevention!& the cost of evaluating dog readiness for adoption (appraisal!& the cost of additional training for dogs with greater than nor"al behavioral proble"s (production!& or the cost of dogs returned because of behavior proble"s (post-sales!/ '/ ,here are "any possible answers to this questionK students "ay thin. of other cost pools or drivers/ A possible cost pool could be the cost per ani"al returned/ Costs in this pool could include costs for further training activities& for ad"itting the ani"al to the facility and wor.ing with fa"ilies to find other ani"als& and the cost to house the ani"als while waiting for a new fa"ily/ ,he cost driver for this cost pool would be the nu"ber of ani"als returned/ ,here are so"e costs that cannot be "easured& such as the cost of potential adopters who decide not to adopt another ani"al because of a bad e-perience/ 7(+- 'se874ness o8 ABC A/ Accountants are li.ely to believe that A C infor"ation would be useful because A C separates overhead costs into "ore cost pools& and cost drivers are chosen to reflect the cause and effect relationship for costs& accountants "ight believe that this infor"ation would be useful for their organi6ations/ 4n addition& the process of i"ple"enting A C encourages "anagers to identify and eli"inate non-value-added activities/ / *anagers cannot be certain that new ideas will be i"ple"ented correctly in their organi6ation/ 4n addition& because the ideas are new& "anagers cannot .now for certain that they wor. for every organi6ation& or <ust for so"e types of organi6ations/ ,herefore they cannot .now for certain it will be effective for their organi6ation/ 7urther"ore& "anagers cannot .now for certain whether e"ployees in their organi6ation will support the new idea or resist& and additional uncertainty arises about the effectiveness of new ideas when e"ployees are resistant to these changes/ 0tudents "ay have thought of additional uncertainties/ C/ *anagers "ay adopt a new "ethod if they study the "ethod and believe that the benefits will e-ceed the costs for their organi6ation/ *anagers are accusto"ed to "a.ing decisions under uncertaintyK they do not need absolute RproofS before adopting a

Chapter 7: Activity- ased Costing and *anage"ent 7-$7 potentially beneficial "ethod/ 4n addition& "anagers are "ore apt to adopt a new "ethod if co"petitors are adopting it/ ,hey "ay feel that co"petitors will have an edge because of this new "ethod and worry that their organi6ation will suffer if the "ethod is not adopted/ 1r "anagers "ay believe they can "ove ahead of co"petitors by e"ploying the new "ethod/ Consultants and others who sell the "ethods "ay convince "anagers that the "ethod is appropriate for their organi6ation& and so the "anagers adopt it/ ?/ 1ver ti"e& "any different types of organi6ations i"ple"ent a new idea and for so"e organi6ations it wor.s well and for others it does not wor. well/ 2vidence accu"ulates that the new "ethod is not a cure-all for organi6ational proble"s/ 9ew "ethods are developed and are advertised widely that "ay overshadow the older "ethods/ 4n addition& over ti"e so"e new "ethod ideas beco"e co""on practice/ 7or e-a"ple& a focus on quality has beco"e co""onplace/ 2/ 4n a recession& "anagers focus less attention on e-panding operations and "ore attention on i"proving cost effectiveness& co"petitiveness& and profitability/ A C infor"ation can help organi6ations identify non-value added activities& reduce costs& i"prove quality& and co"pete "ore effectively/ ,hese results are "ore i"portant when business conditions are less favorable/ 7(+. Co4om:o ;ro<en %og7rt A/
0ales :evenue >ess: 5rice 5ro"otions 9et 0ales >ess: C1A0 U 4ngredients& 5ac.aging P 0torage1 >ess: C1A0 U 5ic.F5ac. P 0hipping$ Aross *argin >ess: *erchandising >ess: 0APA 4nco"e
1

4"pulse 0eg"ent ;ogurt 0hops ,otal B$'&CC3&333 B)&I73&333 B$I&C)3&333 ('&+33&333! (I33&333! ((&)33&333! $3&$C3&333 )&373&333 $)&')3&333 (11&(33&333! ($&C)3&333! (1(&$)3&333! ($&+$)&333! ('7)&333! ('&333&333! +&$))&333 1&C()&333 C&133&333 (1&+C3&333! (()&333! (1&7$)&333! ('&C+1&333! ('I&333! ('&I33&333! B 71(&333 B1&7+1&333 B $&(7)&333

,he case states that the portion of C1A0 related to ingredients& pac.aging& and storage are the sa"e across seg"ents/ ,herefore& these costs are allocated equally to all cases: 4"pulse seg"ent: B1(&$)3&333 - (1&$33&333 casesF1&)33&333 cases! B11&(33&333 ;ogurt shops: B1(&$)3&333 - ('33&333 casesF1&)33&333 cases! $&C)3&333 ,otal B1(&$)3&333

7-$C Cost *anage"ent

$

5ic.Fpac. P shipping costs are allocated as follows:

7ull pallets V B7) each: Cases in full pallets ?ivided by cases per pallet 9u"ber of full pallets ,i"es cost per full pallet ,otal full pallet cost 4ndividual orders V B$/$) per case: 4ndividual cases ,i"es cost per case ,otal individual case cost ,otal pic.Fpac. cost

+3&333 W 7) C33 - B7) B+3&333 1&1(3&333 - B$/$) B$&)+)&333 B$&+$)&333

$(3&333 W 7) '&$33 - B7) B$(3&333 +3&333 - B$/$) B1')&333 B'7)&333

/ 9o& these were not the only possible cost ob<ects/ Alternatives included: geographic regions& individual "anufacturing processes& si6e of custo"ers (in ter"s of total annual sales!& product flavors& and sales people/ C/ 1/ ,he set of A C activities is different fro" traditional cost categories because traditional costing syste"s tend to aggregate costs that "ay be driven by different factors into single cost pools& but A C activities and cost pools are associated with cost drivers/ ,his is "ore easily done when costs are separated into a larger nu"ber of cost pools/ $/ ,here are "any possible answers to this questionK students "ay thin. of reasons not listed here/ ecause past cost data were accu"ulated using these cost categories& "aintaining the old categories would "a.e it easier for the "anagers to analy6e cost trends/ ,he "anagers "ight have believed that the old cost categories were sufficient Ti/e/& that they provided the "ost appropriate brea.downs of costs under A C/ ,he "anagers "ight have believed that the cost to identify and gather data for new categories would e-ceed the benefit/ ,he use of old categories reduced i"ple"entation ti"e and avoided the need for significant e"ployee training/ ?/ 1/ Pick/pack and shipping costs: 0hipping costs are li.ely to vary with the nu"ber of units shipped& where a unit "ay be defined as a case or a pound of weight/ However& shipping costs "ight also vary according to the si6e of a ship"entK it costs less to deliver a large quantity to one location than to deliver s"aller quantities to "any locations/ ,hus& the shipping costs "ight be considered batch-level/ 5ic.ing and pac.ing costs probably vary with the ti"e needed to locate& obtain& and pac. a single ship"ent/ ,his cost "ight be a unit-level cost that varies with nu"ber of cases/ However& it probably costs less per case to pic.Fpac. a full pallet than a s"aller order/ ,herefore& the pic.Fpac. costs are li.ely to be batch-level& where a batch is an individual ship"ent/

Chapter 7: Activity- ased Costing and *anage"ent 7-$I NNote: 0tudents often focus on the unit-level aspect of the pic.Fpac. and shipping costs and fail to recogni6e potential classification as batch-level/ 0tudent difficulty with this question "ight be caused partly by a lac. of understanding of operations in a warehouse setting/O $/ Selling, general, and administrative costs: 0elling& general and ad"inistrative costs probably include salaries and other costs for sales& general "anage"ent& accounting& hu"an resources& etc/ ,hese costs are "ost li.ely to be considered facility-level costs/ 1verall& they probably do not vary with the individual nu"bers of units& batches& products& or custo"ers serviced/ Although selling costs "ight vary with so"e level of sales activity& these costs are not li.ely to be a "a<or part of the overall selling& general and ad"inistrative costs/ Alternatively& these costs "ight be considered product-level fro" the perspective of Aeneral *ills/ Colo"bo 7ro6en ;ogurt is one product line within a "uch larger co"pany/ 2/ 1/ Pick/pack and shipping costs: Colo"bo has chosen two cost drivers for the pic.Fpac. and shipping costs/ 1ne cost driver is the nu"ber of full pallets& and the other driver is the nu"ber of individual cases/ As discussed in 5art ?& so"e parts of the pic.Fpac. and shipping costs are li.ely to vary with nu"ber of units such as weight& that could be represented either by nu"ber of cases or nu"ber of pallets/ 1ther parts of these costs are li.ely to vary with the nu"ber of batches/ ,he cost drivers chosen by Colo"bo allow for lower total cost per batch when a full pallet is shipped/ ,herefore& the choice of cost drivers appears to be reasonable/ $/ Selling, general, and administrative costs: As discussed in 5art ?& the selling& general& and ad"inistrative costs are "ost li.ely facility-level costs that are not usually allocated to individual product lines/ ,hus& it can argued that the cost driver chosenTand any other cost driverTwould not be appropriate/ However& under the assu"ption that "ost of the selling& general& and ad"inistrative costs consist of selling costs& then it would be appropriate to allocate these costs to product lines/ 4n that case& it would be reasonable to use sales representative ti"e as a cost driver because greater ti"e is li.ely to cause higher costs/ NNote: 0tudents have a tendency to discuss whether they agree with Colo"bo=s "ethod for esti"ating the volu"e of the cost driver rather than to discuss the reasonableness of the cost driver itself/ ,his "isunderstanding can lead to a "eaningful class discussion about the difference between cost "easure"ent and cost behavior/O 7/ ,here is no one answer to this part/ 0a"ple solutions and a discussion of typical student responses will be included in assess"ent guidance on the 4nstructor=s web site for the te-tboo. (available at www/wiley/co"FcollegeFeldenburg!/

7-'3 Cost *anage"ent

B'IL5 %O'R #RO;E""IONAL COM#E ENCIE"

7(+7 ;oc7s on #ro8essiona4 Competency= Research A/ >earning ob<ective Q+ (R%hat Are the enefits& Costs& and >i"itations of A C and A *#S! specifically addressed the following uncertainties related to A C calculations: Choice of activities Choice of cost drivers 4nability to foresee all possible uses of infor"ation Choice of deno"inator in allocation rate *is"easure"ent of costs assigned to cost pools ,hese uncertainties lead to uncertainties about the interpretation of A C infor"ation/ 7or e-a"ple& uncertainties about selection of the best cost driver lead to uncertainties about whether costs are li.ely to vary with changes in the volu"e of the cost driver/ 0i"ilarly& if "anagers cannot be certain whether the costs assigned to cost pools are "is"easured& then they also cannot be certain that A C costs represent the actual costs of each activity/ / 1/ :esearch is needed to identify activities and cost drivers and to establish a plan for i"ple"entation/ :esearch includes discussing operations and costs with individuals throughout the organi6ation& "eeting and holding discussions with "e"bers of an A C tea"& investigating the A C practices used by other co"panies& reading articles and cases about A C& attending courses on A C i"ple"entation& and other activities/ $/ An A C tea" should consist of individuals fro" different functional areas within the organi6ation/ ecause of their different bac.grounds& tea" "e"bers bring different types of .nowledge and perceptions about the co"pany to the tea" "eetings/ ,his diversity increases creativity and also increases the li.elihood that appropriate issues will be considered as choices are "ade about activities and cost drivers/ '/ 7ollowing A C syste" i"ple"entation& "anagers and accountants should continue to evaluate the effectiveness of the syste" design and consider i"prove"ents as needed/ 2ven a syste" that is highly appropriate at one point in ti"e can beco"e less useful as operations evolve over ti"e/ ,his requires research into the usefulness of the e-isting syste" and investigation of potential "odifications/ C/ 1/ Available infor"ation about A C and A * practices include articles& boo.s& lectures& courses& and the personal e-periences of people/ $/ Accountants should always strive to perfor" their wor. in a professional "anner/ %hen there are no authoritative rules& accountants need to investigate alternative sources of infor"ation (see part C/1! and deter"ine the best course of action/

Chapter 7: Activity- ased Costing and *anage"ent 7-'1 '/ Articulating assu"ptions and reasoning provides two "a<or benefits/ 7irst& the process of articulation leads to discovery of flaws in the assu"ptions and reasoning/ *ost people engage in "ore careful thin.ing when they articulate it/ 0econd& presenting assu"ptions and e-plaining reasoning to other people often leads to the discovery of new relevant infor"ation/ 1ther people "ay point out flaws in the assu"ptions or reco""end better solutions/ (/ Conflicting reco""endations "ight e-ist because of differences in operations& accounting syste"s& i"ple"entation resources& and goals/ Accountants use professional <udg"ent and elicit advice fro" e-perts& when appropriate& as they choose a"ong conflicting reco""endations/ Accountants are better able to apply <udg"ent when they conduct sufficient research to fully understand the A C "ethods and the reasons for conflicting reco""endations/ 7(+/ Integrating Across the C7rric747m= Corporate "ocia4 Responsi:i4ity ,he answers in this proble" depend on the definitions used for environ"ental accounting/ ,he 8/0/ 2nviron"ental 5rotection Agency (25A! defines three types of environ"ental accounting:1 National income accounting: 9ational-level reporting of the consu"ption of renewable and nonrenewable natural resources/ Financial accounting: Co"pany-level reporting that focuses pri"arily on the public disclosure of "aterial environ"ental liabilities and costs according to AAA5/ anagement accounting: Co"pany-& seg"ent-& product line-& facility-& or syste"-level reporting of environ"ental infor"ation to support "anage"ent decision "a.ing/ ,he infor"ation could be used to plan and to direct "anage"ent attention towards environ"ental issuesK assist "anagers in "a.ing specific decisions such as purchasing& outsourcing& capital invest"ents& product pricing& ris. "anage"ent& processFproduct design& or co"pliance strategiesK or control and "otivate behavior to i"prove business results/

,raditionally& co"panies have not publicly disclosed environ"ental "anage"ent accounting infor"ation/ However& so"e govern"ents have begun requiring co"panies to publicly disclose this type of infor"ation& and the awards described in the proble" are designed to encourage greater voluntary disclosure/ ,he solutions provided below assu"e that Renviron"ental accountingS "eans public disclosure andFor internal use of environ"ental "anage"ent accounting/ A/ 2nviron"ental accounting is an ethical proble" because of potential conflicts a"ong the interests of "anagers& co"panies& shareholders& vendors& custo"ers& co"petitors& govern"ents& society in general& and future generations/ *anagers& co"panies& and shareholders are often interested in "a-i"i6ing profits& which often conflicts with
1

1ffice of 5ollution 5revention and ,o-ics& 8/0/ 2nviron"ental 5rotection Agency& An !ntroduction to "nvironmental Accounting As A #usiness anagement $ool: %ey &oncepts And $erms& 25A 7($-:-I)-331& @une 1II)& accessible at www/epa/govFopptintrFacctgFresources/ht"/

7-'$ Cost *anage"ent "anage"ent e"phasis on environ"ental considerations or public disclosure of environ"ental infor"ation/ %hen co"panies report "ore environ"ental infor"ation& they are "ore li.ely to be forced by govern"ental regulation or by public opinion to reduce negative environ"ental effects/ Co"petitors and other co"panies in the supply chain (vendors and custo"ers! are also affected by a co"pany=s environ"ental reporting/ 4nfor"ation about environ"ental issues related to one co"pany is li.ely to be infor"ative about environ"ental issues for other co"panies in an industry/ Consu"ers and public interest groups generally prefer "ore infor"ation about environ"ental issues to i"prove their abilities to "onitor co"panies and ta.e actions against co"panies they see as degrading the environ"ental/ Aovern"ents are often caught in the "iddle/ %hile they want to protect public environ"ental interests& they also want to pro"ote econo"ic growth/ / ,he answer to this question depends on the co"panies that students investigate/ 0tudents often have difficulty distinguishing between RpleasingS presentations and infor"ative presentations/ ,he answer to this question should include specific reasons about infor"ation on one site being "ore understandable or easy to find than on another site/ C/ Co"pany responsibilities for reporting environ"ental infor"ation are partly a function of environ"ental regulation/ 4n countries where greater disclosure is required& co"panies have a clear legal responsibility to provide it/ Co"pany responsibilities for voluntary disclosure are less clear/ ecause of the conflicts of interest "entioned in 5art A above& "anagers have no clear-cut responsibility/ 4f viewed fro" the perspective of shareholders& the co"pany=s responsibility "ight be to "ini"i6e environ"ental disclosure/ 2"ployees have a sta.e in the co"pany=s financial well-being and "ight also prefer less disclosureK however& e"ployees and their fa"ilies "ight be affected by environ"ental proble"s such as air quality degradation or ha6ardous waste/ 4n this case& the co"pany=s responsibility "ight be to provide greater disclosure/ Co"panies generally do not assu"e responsibility for co"petitors/ However& greater disclosure by one co"pany in an industry "ight sti"ulate si"ilar disclosures by co"petitors/ ,he responsibility to suppliers and custo"ers includes "i-ed incentives/ >ess disclosure "ight help all related co"panies achieve higher profits& but greater disclosure could lead to i"proved environ"ental perfor"ance across the supply chain/ Co"pany "anagers often view their responsibility toward govern"ent regulators and the general public as "eeting "ini"u" legal require"ents/ However& this view of responsibility assu"es that co"panies have no social responsibility for environ"ental "atters/ An alternative view is that co"panies are responsible for the stewardship of resources they use today and for the resources available to future generations/ *any people would argue that co"pany responsibilities lie so"ewhere in between these two e-tre"esTthat "anagers have responsibilities to generate profits and also to find ways to "ini"i6e adverse environ"ental effects/ 7ro" this viewpoint& "anagers have a responsibility to use environ"ental accounting to help the" "a.e better environ"ental decisions/ ?/ ,he answer to this question depends on the interpretation of Rbetter reportingS for environ"ental behavior& policies& and procedures/ 4n Chapter 1 (2-hibit 1/I& page 1$!& higher quality reports were defined as "ore relevant& understandable& and available/ Aiven this definition& a better environ"ental report would provide infor"ation that is "ore useful to constituents such as shareholders& regulators& custo"ers& and the general

Chapter 7: Activity- ased Costing and *anage"ent 7-'' public/ 4t would be easier to understand and would be readily available in a ti"ely "anner/ 1utsiders who read an environ"ental report can deter"ine whether the report is easy to understand and available/ However& it is "ore difficult to deter"ine whether a report provides the "ost useful infor"ation& particularly when disclosures are voluntary/ %hen infor"ation is provided voluntarily& it "ay be biased/ 7or e-a"ple& an environ"ental report could provide considerable infor"ation about a single environ"entally-friendly pro<ect& but be silent about environ"ental proble"s/ ,herefore& it "ay not be possible to deter"ine whether one co"pany provides better environ"ental reporting than another/ However& suppose it CA9 be deter"ined that one co"pany provides better environ"ental reporting than another/ 4n that case& better reporting "ight occur because the co"pany has better environ"ental policies and procedures& which in turn could lead to better environ"ental behavior/ However& the other co"pany could have better environ"ental behavior& policies& and procedures but si"ply fail to provide better reporting/ 2/ 1bviously& govern"ental regulation is a factor affecting the publication of environ"ental accounting reports/ 4n the absence of such regulation& co"panies are li.ely to be influenced by the actions of other co"paniesTparticularly co"petitorsTand public opinion/ *anagers also create and are influenced by the co"pany=s "ission and core co"petencies/ Co"panies that place high priority on environ"ental responsibility are "ore li.ely to present a public environ"ental accounting report/ 7/ *any factors influence govern"ental e"phasis on "atters such as environ"ental accounting/ Aovern"ents in econo"ically stable countries are li.ely to place a greater e"phasis on the environ"ent/ Countries in which citi6ens are "ore concerned about the environ"ent will also place greater e"phasis on the environ"ent/ Aovern"ents are also influenced by the actions of other govern"ents and by the require"ents of international organi6ations such as the 2uropean 8nion/ A/ *ethods si"ilar to the ones described in the chapter for "easuring quality costs could be used to "easure environ"ental costs/ ,he first step would be to identify different types of environ"ental activities& costs& and drivers/ 1ne e-a"ple is the list of cost categories included in the proble"& developed by @apan=s *inistry of the 2nviron"ent/ H/ ,here are two ways that preparing and publishing environ"ental accounting reports help co"panies reduce its environ"ental costs/ 7irst& the process of preparing these reports necessarily includes investigation of environ"ental accounting and reports released by other co"panies/ ,his investigation can lead to new ideas for reducing environ"ental costs/ 0econd& co"panies that public release environ"ental infor"ation "ight be encouraged to "ore actively engage in continuous environ"ental i"prove"ents/ 4/ ,his question is open-ended& so answers will vary/ 4t is i"portant to clarify the trade-offs "ade when arriving at conclusions for this type of proble"/ 0o"e people have a tendency to adopt a Rhigh roadS and fail to recogni6e the practicalities of govern"ental regulation/ 1ther people tend to do the oppositeTthey dis"iss what they perceive as

7-'( Cost *anage"ent idealistic solutions and fail to see. creative or new solutions/ ,he best solutions are those which clarify trade-offs& recogni6e li"itations& and yet still see. to achieve i"prove"ent/