Activity Based Costing
Cost attribution to cost units on the basis of benefits received from activities, i.e. ordering, setting up, assuring quality.
Activity costs and the instances of cost driver occurrence are measured and used to decide on overhead absorption rates.
Five stage process:
1. Identify the various activities within an organisation 2. Determine the key cost driver for each activity
3. Create cost pools to collect activity cost s having the same cost driver 4. Measure the incidence of each cost driver for each product/service 5. Attribute the cost of each pool (and activity) to products/services based on the cost driver recurrence.
ABC is founded on the premise that activities that cause costs not products.
Varies from traditional overhead attribution methods by:
Costs are identified by activities which can be linked in processes across departments rather than by costs centres. There are potentially more activities and cost pools than there are cost centres.
All activities are linked directly with products in contrast to traditional methods where departments overheads (ie service centre) are transferred to production cost centres.
There is a clear cause and cost effect.
• Data needed in order to have an accurate system. Large amount, lot of manpower. • ABC systems utilise and produce data which is largely historic. • Many costs (ie rent rates etc) still need to be apportioned to activities or to cost centres via traditional methods, weakening ABC analysis. • May be difficult to establish causality for a particular activity. • Not a replacement for traditional methods but an extension of.
Limiting factor analysis – when one resource is limited, maximum demand for products needs to be know to calculate.
The difference between sales revenue and the cost of bought in goods and services which is then used to finance value added activities.
Sales less cost of bought in materials, components and services and Alternatively but equivalently Operating Profit+Employee Costs+Depreciation+Amortisation.
The value created by the company is used to reward stakeholders and to sustain and develop the organisation.
Six different ways value added can be used:
1. Payments to providers of capital (cost of funds)
2. Payments to staff (total operating employee costs)
3. Corporation taxes paid to government
4. Investment (R&D, Depn of capital equipment)
5. Amortisation (Depn of intangibles) (acquisition goodwill in most cases) 6. Retained Value Added (left after five above deducted). Will be negative if not enough to cover first five.
Total Quality Management
Doing things right first time.
It is a way of managing people and business processes to ensure complete customer satisfaction at every stage, internally and externally.
The core of TQM is customer-supplier interfaces and at each interface lie a number of processes.
Key management functions – People – Processes – Systems in the organisation.
Commitment to quality, communication of quality message and need to change culture.
Quality “delighting the customer by fully meeting their needs and expectations”. Performance, appearance, availability, delivery, reliability, maintainability, cost effectiveness and price.
Quality starts with market research.
Quality chains – customer and supplier interfaces.
Who are my customers, what are their needs, how can I find out, how can I measure my ability to meet their needs, do I have the capability to meet their needs (if not, how do I improve), do I continually meet their meets (if not, why and how change), how can I monitor changes in their needs.
Who are my internal suppliers, what are my true needs and expectations, how do I communicate my needs to them, do my suppliers have capability etc etc.
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