Performance management

  1. What is ABC?
    • Activity based costing
    • this is the key costing method.
  2. What are the reasons for the development of ABC?
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  3. What are the methodical step by step approach to ABC?
    • 1. Group production overheads into activities, according to how they are driven a ,
    • 2. Identify cost drivers for each activity. 
    • 3. Calculate an O.A.R for each activity cost. 
    • 4. Absorb the activity costs into each product. 
    • 5. Calculate the production cost and the profit / (loss) if required.
  4. What are the advantages of ABC?
    • 1. More realistic costs.
    • 2. Better insight into cost drivers, resulting in better cost control.
    • 3. Particularly useful where overhead costs are a significant proportion of total costs.
    • 4. ABC recognises that overhead costs are not all related to production and sales volume.
    • 5. ABC call be applied to all overhead costs, not just production overheads
    • 6. ABC can be used just as easily in service docs ting as in product costing.
  5. What are the criticisms / disadvantages of ABC?
    • 1. It is impossible to allocate all overhead cost to specific activities.
    • 2. The choice of both activities and cost drivers might be inappropriate.
    • 3. ABC can be more complex to explain to the stakeholders of the costing exercise.
    • 4. The benefits obtained from ABC might not justify the costs
    • 5. ABC will be of limited benefit if overhead costs are primarily volume related or are a small proportion of teh total costs.
  6. What are the implications of ABC?
    • 1. Pricing - more realistic costs improve cost plus price.
    • 2. Sales strategy - more realistic margins can help focus sales strategy a.
    • 3. Decision making - e.g. Research and development can be directed at products with better margins.
    • 4. Performance management can be improved due to the settings of more realistic budgets and improved cost control.
Card Set
Performance management
Management accounting exam