Chapter 04: Activity Based Management and Activity-Based Costing IM 10
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publicly accessible website, in whole or in part.
iv. Effectiveness of current cost allocation methods; and
v. Rate of growth of period costs.
iii. There is a climate and culture of cost reduction in the company.
2. Large Product or Service Variety
a. Product or Service variety refers to the number of different types of products made or
services provided.
systems.
i. Mass customization does have some drawbacks:
There can be too many choices, creating confusion for customers;
(selections).
c. Most traditional cost systems do not provide information such as the number of different parts
3. High Product/Process Complexity
complexity.
i. With ABC data, reengineering efforts can be focused on the primary causes of
cause time delays and cost increases.
4. Lack of Commonality in Overhead Costs
a. Certain products and services create considerably more overhead costs than others.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
ii. Some products require high levels of advertising, some use high-cost distribution
overhead cost pools are used.
iv. The result is increased costs for some products that should be costed lower and lower
disproportionate amount of customer service.
5. Irrationality of Current Cost Allocations
has undergone one or more significant changes.
b. Many companies with automated production processes have experienced large increases in
6. Changes in Business Environment
a. A change in the competitive environment in which a company operates may also mean a
need for better cost information. Increased competition may occur for several reasons:
b. Changes in management strategy can also signal a need for a new cost system.
c. Continuous improvement is an ongoing process of enhancing employee task performance,
level of product quality, and level of company service through eliminating non-value-added
d. The benefits from ABC are two-dimensional in that ABC improves product costs for
e. Traditional accounting systems focus attention on controlling cost incurrence, while ABC
LO.6: What criticisms have been directed at activity-based costing?
Chapter 04: Activity Based Management and Activity-Based Costing IM 12
publicly accessible website, in whole or in part.
F. Criticisms of Activity-Based Costing
2. Management must create an environment for change that overcomes a variety of individual,
organizational, and environmental barriers.
c. Environmental barriers are often built by employee groups (including unions), regulatory
agencies, or other stakeholders of interest.
3. ABC does not specifically comply with generally accepted accounting principles.
depreciation should not be allocated to products.
5. Companies can implement ABC in support and in conjunction with total quality management, just-
in-time, or any other world-class methodologies.
lead time possible.
b. ABC and ABM are effective in supporting continuous improvement, short lead times, and
flexible manufacturing by helping managers to:
i. identify and monitor significant technology costs;
iii. increase market share;
v. identify activities that do not contribute to perceived customer value (i.e., non-value-
added activities or waste);
ix. analyze performance problems; and
x. promote standards of excellence.
Chapter 04: Activity Based Management and Activity-Based Costing IM 13
c. Text Exhibit 4.12 (p. 122) presents a graph portraying efficiency and effectiveness of
