Chapter 07A – Lecture Notes
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I. Appendix 7A: ABC action analysis (slide #1 is a title slide)
Learning Objective 6: Prepare an action analysis report
using activity-based costing data and interpret the report.
A. Key definitions/concepts
i. A conventional ABC analysis does not identify
potentially relevant costs. An action analysis report
can help in this regard because it shows what costs
have been assigned to a cost object and it indicates
how difficult it would be to adjust those costs in
response to changes in the level of activity.
B. Baxter Battery – revisited
i. The first-stage allocation process
1. In addition to computing an overall activity rate
for each activity cost pool, an activity rate is
computed for each type of overhead cost that is
consumed supporting a given activity.
a. For example, the customer orders activity
has six activity rates that sum to the total of
$452 from the conventional ABC analysis.
ii. The second-stage allocation process (this stage
requires assigning product costs by each type of
overhead cost.)
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1. In the Baxter Battery illustration, there are, for
example, six activity cost assignments from the
customer orders activity to the SureStart batteries.
These six assignments total $1,808,000 as in the
conventional ABC analysis.
a. Notice, the total ABC costs assigned to
SureStart batteries is $4,928,000 which is
the same as in the conventional ABC
analysis.
2. As another example, there are six assignments
from the design changes activity to the LongLife
batteries. These six assignments total $3,040,000
as in the conventional ABC analysis.
a. Notice, the total ABC costs assigned to the
LongLife batteries is $7,832,000 which is
the same as in the conventional ABC
analysis.
iii. Labeling costs using an ease of adjustment code
1. Key definitions
a. Green costs adjust more or less
automatically to changes in activity level
without any action by managers.
(1). For example, direct materials cost
would automatically change in
response to changes in activity level
without management action.
b. Yellow costs can be adjusted to changes in
activity level, but it would require
management action to realize the change in
cost.
(1). For example, direct and indirect labor
may be classified as yellow costs
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Chapter 07A – Lecture Notes
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because management action would be
required to hire or layoff employees.
c. Red costs can be adjusted to changes in
activity level only with a great deal of
difficulty and with management
intervention.
(1). For example, a factory building lease
would be a red cost because it would
be very difficult and expensive to
break the lease.
2. Calculating Baxter Battery’s green, yellow, and
red margins.
a. The green, yellow, and red margins for the
LongLife batteries would be $11,700,000,
$478,000, and ($1,132,000), respectively.
(1). In this example, before managers
would decide to eliminate the
LongLife batteries product line, they
would need to commit to taking
management action where required to
reduce costs or redeploy resources.
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