Activity-Based Cost

The emphasis of ABC on cross-functional processes is the reason for its importance in single-company applications. Its potential rises when talking about supply chains. In the supply chain world, any one company s operations are part of a flow from incoming (or upstream) partners to outgoing (or downstream) partners. Activities in a company and the way we account for them should no longer be viewed as stand-alone and isolated from the chain. ABC is a way to reinforce this view. 

If a company is even modestly successful as a supply chain partner, there will be traces of several chains, or businesses within the business, present. Chapter 9 described these separate supply chains as serving the needs of individual spheres. Each chain should be tuned to the needs of a different customer segment and therefore make different demands on each activity. 

A simple illustration is in a customer requirement for the warehouse to mark outbound product to individual customer spedhcations. This increasingly occurs in both factories and warehouses. One customer wants black ink another wants blue ink. One wants custom corrugated cartons another is satished with stick-on labels on standard cartons. One wants its products shipped to its own distribution center another wants direct shipment to retail stores. ABC will enable an understanding of what resources are dedicated to what chain and how to price the various services. 

TABLE 27.6 Comparison of Activity-Based Costing Approaches 

The Glop made by Process accounts for 5 percent of the final costs of High Tech. Old Line fabricates components for High Tech, and its share of final product cost is 15 percent. High Tech s share of the cost is 80 percent (55 percent internal, 25 percent external). These companies partner in the supply chain and mutually depend on each other. Their capabilities are complementary, and they produce the best quality products in their respective industries. 

Hicks advocates abc (small letters) to represent the application of acfiv-ify-based costing to planning and strategic decision-making. This form requires far less set-up and maintenance. Its analogy is the snapshot, rather than the movie. With abc, one can go into as much detail as needed to make planning decisions or assess improvement potential. It is also far less expen- 

Supply Chain Partner Cost Structure and Composite (Available in Chapter 25 Spreadsheets) 

This case sets the stage for describing and applying ABC in this supply chain. The topics we cover include the following  

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When estimating the operating and maintenance costs for various options, it is recommended that the actual activities which are anticipated are specified and costed. This will run into the detail of frequency and duration of maintenance activities such as inspection, overhaul, painting. This technique allows a much more realistic estimate of opex to be made, rather than relying on the traditional method of estimating opex based on a percentage of capex. The benefits of this activity based costing are further discussed in Section 13.0 and 14.0. 

Huiidal, M. S. 1997 Product Costing a comparison of conventional and activity based costing methods. Journal of Engineering Design, 8(1), 91-103. 

Roztocki, N. and Needy, K.L. (1998) An integrated activity-based costing and economic value added system as an engineering management tool for manufacturers. ASEM National Conference Proceedings, Virginia Beach, 1-3 October 1998, pp. 77-84. 

Cokins G (2001) Activity-based cost management. John Wiley Sons, New York et al. 

Shapiro JF (1999) On the connections among activity-based costing, mathematical programming models for analyzing strategic decisions, and the resource-based view of the firm. European Journal of Operational Research 118 295-314... 

Activity-Based Costing (ABC) Activity-Based Budgeting (ABB)... 

Figure 18-3. Activities-based costing versus activity-based budgeting.

For these reasons, Activity-Based Costing (ABC), the most accurate method of cost analysis, is particularly helpful in identifying all of the individual costs of an operating practice or an event, such as a chemical spill. In analyzing a spill, for example, the audit team can attach a dollar value to waste of materials and labor, system changes, unused capacity, and the spill s myriad overhead costs, as well as corporate legal, PR, and other administrative support costs, all of which need to be carefully understood in considering process improvements. 

Resource items can be identified and measured using several different techniques, each having both positive and negative attributes. These techniques include (but are not limited to) direct measurement in clinical trials, " direct measurement in activity-based costing exercises, retrospective database assessment, and physician/healthcare professional... 

Cooper, R., The Rise of Activity Based Costing, Part I, Journal of Cost Management, Volume 6, Summer 1988. 

Development of Activity-based Cost Functions for Cellnlase, Invertase, and Other Enzymes... 

Level II (process planning and control) is where business process owners current business processes are planned and controlled, with methods for scheduling and capacity and (activity-based) cost analysis also available. Process monitoring lets process managers keep an eye on the states of the various processes. 

Metrics may also be indexed with respect to a manufacturing output, input, throughput, or batch size, as discussed in AUen and Rosselot (1997). Product-based environmental impact analysis requires activity-based inventory assessment (Stuart et al. 1998). Similar to activity-based costing (see Chapter 89), activity-based environmental inventory assessment recognizes the hieiarchy of impacts tmd assigns them proportionately to an activity such as a product or service. 

Use activity-based costing to identify and eliminate non-value-added activity. 

Justifying Energy-Conservation Opportunities Using Activity-Based Costing... 

While energy costs are typically considered overheads, costs can be traceable to specific activities within the operation. Applying activity based costing, life-cycle costing, or other systems that provide accurate data on energy use allows opportunities for conservation and system upgrade to be identified and justified. 

Apply activity-based costing to find energy-related delays. 

Reengineering tools include benchmarking, modeling and analysis tools, simulation, and activity-based costing. 

Maluso, N. (1997), Activity Based Costing What Is It and How Can Reengineering Teams Use It Reengineering Business Case Series, ProSci. 

Labor management Provide status of personnel in real time. This activity includes time and attendance reporting, certification tracking, as well as the ability to track indirect functions such as material preparation or tool room work as a basis for activity-based costing. It may interact with resource allocation to determine optimal personnel assignments. 

Observations and studies were made of the distribution center s activities to quantify current practices. Any assumptions or atypical occiurences observed were evaluated on their individual merit in order not to adversely affect the study. To deliver better alternatives, accurate information was essential for the activity-based costing models utilized in the study. In addition, aU exceptions had to be considered to maintain the integrity of the information being supplied to the manufacturer. 

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