Profit Margin
equals a product's contribution margin less the cost of capacity resources needed to support its production. This is also the appropriate measure for evaluating long term profitability.
Four steps in designing a product costing system
1 determine how to form cost pools
2 identify which cost pools to allocate
3 identify the cost driver to use for allocating each cost pool
4 determine the appropriate denominator volume of each cost driver to calculate allocation rate
Activity-Based Costing
this method assigns the controllable costs of capacity resources more reliably than traditional systems do.
Business Process
converts organizational inputs into a measurable output
Activity
the basic element of any business process
Activity-Based Management
using information from ABC system to improve profitability by managing products, customers, and resources
Batch-level activity
activities that pertain to a group of units
Cross-subsidization
some cost allocation systems allocate systematically lower amounts to some products and higher amounts to allocate other products. In such instances, prducts receiving higher allocations are said cross-subsidize products receiving lower allocations.
Customer Planning
the set of decisions to assess the profitability of individual customers and customer segments, including the actions taken to improve their profitability.
Facility-level activity
activities that are required to sustain the business
Practical capacity
a realistic estimate of the maximum possible activity level
Product-/-customer-level activity
activities that relate to a specific product or a specific customer
product planning
the set of decisions about which products to offer and their prices
profit margin
contribution margin less the controllable cost of capacity resources
resource planning
decisions that pertain to improving the efficiency and effectiveness of organizational processes
unit-level activity
activities that are proportional to production volume
Whale Curve
a curve that plots customer profitability, after ranking customers in order of their profitability. Has the appearance of a "whale"
Forming cost pools with ABC
the pools are formed by activities
Determining the costs in each cost pool ABC
this is done by analyzing each account to determine the activities facilitated by the expenditure
Deciding which costs to allocate ABC
they only allocate cost that are considered to be controllable rather than allocating all manufacturing costs and expenses all selling costs
Measuring Denominator volume and ABC
the key difference here is practical capacity is used as the denominator instead of the actual volume. This means that if not all of the capacity is used in a period it may seem like it was a costlier period
steps to improve efficiency with ABC
1 develop a process map for each activity/process chosen
2 identify value- and non-value-adding activities
3 seek ways to improve value adding activities
