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The Next Generation of ABC Devine et al., Management Accounting Quarterly Fall 2005

The Next Generation of ABC Devine et al., Management Accounting Quarterly Fall 2005. ACCT7320 Thanks to Ye Tian. Principles of ABC …. ABC arose in the 1980s. In ABC costs are assigned according to 'cause and effect' relationship between activities (the actual process) and cost objects.

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The Next Generation of ABC Devine et al., Management Accounting Quarterly Fall 2005

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  1. The Next Generation of ABCDevine et al., Management Accounting Quarterly Fall 2005 ACCT7320 Thanks to Ye Tian

  2. Principles of ABC … • ABC arose in the 1980s. • In ABC costs are assigned according to 'cause and effect' relationship between activities (the actual process) and cost objects.

  3. ABC Extension • The principles of activity-based costing can be extended to the allocation of assets to activities. • What’s the benefit? • Product ROI (PROI) • Customer ROI (CROI) measures • Necessary condition to use it: • An existing ABC system • Significant differences in asset utilization across • across customers • across product lines.

  4. Case example:ABC at Parts For Carts • Company’s background: • Manufactures automobile parts • Two primary customers: • Automobile manufacturer (Customer 1) • After-market supplier of auto parts (Customer 2) • Two primary product lines: • “in house” (Product A) • “outside suppliers” (Product B)

  5. Significant impact on PROI: • Product A places high demand on the capital-intensive fabrication activity and low demand on the packaging and warehousing/storage activities • Product B places low demand on the capital-intensive fabrication activity and high demand on the packaging and warehousing/storage activities

  6. PROI analysis:

  7. Significant impact on CROI: • Customer 1 places a high demand on both the highly capital-intensive fabrication and warehousing/storage activities. • Customer 2 places a low demand on these, and a high demand on the packaging activity (with just average capital intensity).

  8. CROI analysis

  9. The impact of Product and Customer ROI on Decision Making • Outsourcing decision • Hmmm…..misleading?! • Better utilization of existing asset • Simplify existing product lines • Redesign the product and/or the manufacturing or distribution processes • Negotiate price with customers

  10. Is asset allocation right for your organization?

  11. Is asset allocation right for your organization? (cont’d.)

  12. Conclusions? • What do you think? • Useful? • Any flaws in the logic?

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