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CHAPTER 4
ACTIVITY-BASED MANAGEMENT AND
ACTIVITY-BASED COSTING
QUESTIONS
1. Activity–based management is a management model that associates an organization’s
activities with the value customers derive from the organization’s products. Efficien–
tomer value.
Specific tools used in ABM include activity analysis, cost driver analysis, activity–
and business process reengineering.
2. Activity analysis is used to separate activities into two groups: those that add val-
duced without impairing the value of products or services to the consumer. The
result should be an increase in profits.
3. Value-added activities are defined from the customer’s perspective because it is
whether he or she actually wants to pay the price for engaging in all of the activi-
vice.
4. In addition to approximately one hour of commercials, the remaining time is spent
showing players standing around, network announcers, replays, cheerleaders, head
the point where it will be put in play next are all non-value-added activities. Peo-
ple who believe that the commercials are informative and interesting and that the
business and GoDaddy says it obtained five percentage points of market share
within the first 48 hours after a Super Bowl ad (R. Nakashima, “At $3 Million per
2/3/11, p. B5).
The cycle efficiency of the game would be 11 ÷ 180 = 6%.
68 Chapter 4
5. The five people would probably not calculate the same MCE. First, times of processes
ties (such as packaging and inspection) are value-added, while others may believe the
6. Service cycle efficiency is generally higher than manufacturing cycle efficiency
7. Yes, cost drivers exist in traditional accounting systems, although they are gener-
ally called “overhead allocation bases.”
cost drivers. Finally, traditional accounting stresses finding an allocation base that
demonstrates strong statistical correlation to the cost, but ABC emphasizes search-
However, regardless of how the drivers are titled or on what bases they are calcu-
lated, the use of the drivers is the same in both systems. Cost drivers are used to
services.
8. By using a single cost pool and a single cost driver to allocate overhead, the more
traditional methods of overhead assignment ignore the influence on cost of the differ-
using multiple cost pools and multiple cost drivers.
ABC spreads costs over all units produced within the appropriate level of activity.
Chapter 4 69
9. As is true with any management or costing system, an ABC system will not “last
forever.” The system must be updated periodically to reflect changes in the com-
pany’s human and physical resources, products/services, and business environ-
10. All companies are not likely to benefit equally from adopting ABC. The greatest
benefits are likely to be gained by firms with complex production processes; firms
11. Some of the additional costs that will be incurred will relate to purchasing and
storage to have the options available as customers make requests. (Interestingly,
may occur on production for cars to be sent to dealers: if the company makes con-
figurations not desired by the customers, the cars may not be sold and the custom-
Customers may be willing to pay modest price variations for different options, but
with a base price of $15,500, customers may likely be price sensitive—especially
so they can produce a dozen or so versions of a vehicle that will satisfy most buy-
ers. That limits the complexity on the factory floor and dealership lots.” (J. Ben-
12. Implementation of ABC requires a significant commitment of time and resources.
Significant time is consumed by preparing process and value charts, identifying
is used to manage the ABC data collection and cost assignments.
70 Chapter 4
EXERCISES
14. Each student will have a different answer. No solution provided. However, it is
16. a. (1) BVA (customers might view this as VA)
(2) BVA
(3) BVA
(4) NVA
(5) NVA
(6) BVA
tags, and with a no-defect clause.
17. a. None of the items is a value-added activity. Products should be designed so that
schedule changes should not be needed.
c. Eliminate factory schedule changes except for those asked for by a customer (in
18. a. Cycle time = 9 + 264 + 3.5 + 6.5 + 3 + 5 = 291 hours
bottling
MCE = (6.5 + 3.0) ÷ 291.0 = 9.5 ÷ 291.0 = 3.3%
Chapter 4 71
19. a.
Value-added activities:
Time
Remove sod and level site
20
Build forms
10
Mix and pour concrete
5
Level concrete and smooth
6
Remove forms
2
Total
43 hours
b.
Non-value-added activities:
Time
Purchase materials
5
Obtain rental equipment
2
Drying time
24
Return rental tools
1
Clean up
4
Total
36 hours
c. Total cycle time = 43 + 36 = 79 hours
20. a.
Value-added activities:
Time
Measuring and cutting materials
9
Assembling materials
3
Building fireplace
12
Pegging logs
8
Cutting and framing doors/windows
5
Sealing joints
4
Total value-added time
41 days
b.
Time
2
10
7
6
6
1
32 days
c. Total cycle time = 41 + 32 = 73 days
the customer’s perspective.
72 Chapter 4
accessible website, in whole or in part.
21. a.
Receiving ingredients
60
Moving ingredients to stockroom
80
Storing ingredients in stockroom
8,200
Moving ingredients from stockroom
8
Measuring ingredients
30
Mixing ingredients
60
Packaging ingredients
50
Moving packaged seasoning to warehouse
100
Storing packaged seasoning in warehouse
20,000
Moving packaged seasoning from warehouse to
trucks
120
Total minutes of cycle time
28,708
d. The company could do many things to improve its MCE. The primary areas on
which to concentrate are the times spent storing ingredients in the stockroom and
22. Each student will have a different answer because determination of VA and NVA
time in this situation depends on Reliance’s perspective of the various activities.
Audit planning and discussion of audit risk 20
Internal control review (likely seen as NVA b/c job is recurring and, if no
previously) 32
Preparing audit program (likely seen as NVA b/c job is recurring and, if no
changes have been made, program “could” be used again) 24
Chapter 4 73
23. a. Step
VA or NVA
Patient arrives at doctor’s office and checks in with receptionist.
NVA
Patient is asked to review previously provided information for
changes; there are none.
NVA
Patient returns forms to receptionist.
NVA
Receptionist verifies patient insurance and collects co-pay.
NVA
Patient waits in waiting room.
NVA
Nurse escorts patient to exam room and takes vital signs.
VA
Patient waits in exam room.
NVA
Physician examines and treats patient.
VA
Patient checks out with receptionist, if needed.
NVA
b. Total VA time = 11 minutes
Total cycle time = 47 minutes
SCE = 11 ÷ 47 = 23.4%
24. a. None of the activities should be perceived as value-added because the product
should have been properly designed originally so that no correction process
should have been needed.
cycle efficiency is
Total time = (15 days × 24 hours × 60 minutes) = 21,600 minutes
2,160 × $15 = $32,400
25. a. The production process in McAllen Co. must have a significant amount of non-
value-added time built into the cycle time. The most likely cause of this NVA
In addition to bottlenecks, the company could be engaging in rush orders that
74 Chapter 4
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
that if all backorders were filled, the current orders could be processed at a
much more rapid pace. Finally, defective units caused by rushing to complete
orders will have to be reworked, thereby causing an even longer delay in pro-
cessing time.
b. A value chart allows a company to analyze all activities that comprise total cy-
cle time. The role of the value chart is to identify those activities that do not
26. Each student will have a different answer; the following are illustrative examples.
b. number of clients (volume measure), number of invoices sent (for usage)
d. number of transactions processed (volume measure), number of calls (for us-
age), number of installations (for usage), number of documents processed (for
usage)
(volume measure)
f. hours of operation (time measure)
27. Each student will have a different answer; the following are illustrative examples.
a. amount of investment in factory machinery and buildings (total cost basis for
depreciation)
c. number of setups (volume driver), total time of setups (alternative volume
measure)
d. number of transactions processed (volume measure), number of service calls
e. average amount of material inventory (volume of material stored), square foot-
age of storage area (storage capacity)
g. number of engineering changes (volume of engineering changes), number of
Chapter 4 75
h. number of print ads (volume measure), seconds of air time (cost measure),
number of new ads developed (measure of professional time)
i. machine hours (for machine-driven usage), outside air temperature (for weather–
related usage)
j. number of product defects (volume of quality defects), pounds of scrap and
batches)
k. machine hours (for maintenance related to the volume of usage of machinery),
average age of equipment (for obsolescence and age-related maintenance)
28. a. O
b. O
c. P
d. O
f. U
g. O
h. U
i. O
j. U (per order)
29. a. P
b. P
c. U
30. a. Total setup cost = $20,445 6 = $122,670
Total setup cost per unit = $122,670 ÷ (68,500 + 15,200 + 900)
= $122,670 ÷ 84,600
76 Chapter 4
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
c. Total number of setups would have been three; total setup cost = ($20,445 3)
= $61,335
Product #453 = $20,445 ÷ 68,500 = $0.30 (rounded)
31. a. Total cost per call = $20,980 ÷ 17,500 = $1.20 (rounded)
Client A [$1.20 (7,000 + 2,200)] = $1.20 9,200
$11,040
Client B ($1.20 4,300)
5,160
Client C ($1.20 4,000)
4,800
Total setup cost assigned (off due to rounding)
$21,000
Service #359: $5,810 ÷ 7,000 = $0.83 per call
Service #360: $7,085 ÷ 6,500 = $1.09 per call
more reasonable allocation process. (For example, assume that the fees were
for directory assistance. If you never used directory assistance, would it seem
a caller of Client A?)
32. a. Total support cost = $312,750 + $125,100 = $437,850
Partner hours = 5 2,100 = 10,500
Staff hours = 12 2,600 = 31,200
b. Total hours = 60 + 220 = 280
c. Professional support rate per hour = $312,750 ÷ 41,700 = $7.50
d. Professional support (280 total hours $7.50) $2,100.00
33. a. Allocation rate = Cost ÷ Allocation base
Contracts rate = $270,000 ÷ 500,000 = $0.54 per contract page