Activity-Based Costs Management System. Topic 4 Management Accounting III. Simple Cost Accounting Systems: Ericson Ice Cream Company Example. Ericson had been the low-cost producer of chocolate and vanilla ice cream, with profit margins exceeding 20% of sales
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Management Accounting III
ABC at Ericson :
20% of computer expenses should be assigned to “support products,” an activity already defined in her activity dictionary, because it was used to keep records on the four products
80% of the computer resource was involved in the production run activity and seemed to relate well to the “handle production runs” activities
HANDLE PRODUCTION RUNS
The ABC model shifts the focus from what the money was being spent on (labor, equipment, supplies) to what the resources acquired by spending are actually doing
Operational activity-based management (ABM) - managers use information collected by the ABC system at the activity level to identify opportunities for reducing costs in indirect and support activities
Activity cost drivers represent the quantity of activities used to produce individual products:
ABC profitability report:
Problems may arise in practice from the approach to activity-based costing that assigns many resource expenses to activities based on interviews, surveys, and direct observation of production and support processes because these activities are time-consuming and expensive
SOME CUSTOMERS MAY BE UNPROFITABLE ONLY BECAUSE IT IS THE START OF THE RELATIONSHIP WITH THE COMPANY. THE COMPANY MAY HAVE INCURRED HIGH COSTS TO ACQUIRE THE CUSTOMER AND THE CUSTOMER’S INITIAL PURCHASES OF PRODUCTS OR SERVICES WERE INSUFFICIENT TO COVER ITS ACQUISITION AND MAINTENANCE COSTS. NO ACTION IS REQUIRED AT THIS POINT. THE COMPANY EXPECTS AND HOPES THAT THE CUSTOMER’S PURCHASES OF PRODUCTS AND SERVICES WILL INCREASE AND SOON BECOME PROFITABLE, INCLUDING RECOVERING ANY LOSSES INCURRED IN THE START-UP YEARS. COMPANIES CAN AFFORD TO BE MORE TOLERANT OF NEWLY-ACQUIRED UNPROFITABLE CUSTOMERS THAN THEY CAN OF UNPROFITABLE CUSTOMERS THEY HAVE SERVED FOR 10 OR MORE YEARS.