Transcript The Next Generation of ABC

The Next Generation of ABC
Devine et al., Management Accounting Quarterly Fall 2005
ACCT7320
Thanks to Ye Tian
Principles of ABC …
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ABC arose in the 1980s.
In ABC costs are assigned according to
'cause and effect' relationship between
activities (the actual process) and cost
objects.
ABC Extension
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The principles of activity-based costing can
be extended to the allocation of assets to
activities.
What’s the benefit?
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Product ROI (PROI)
Customer ROI (CROI) measures
Necessary condition to use it:
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An existing ABC system
Significant differences in asset utilization across
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across customers
across product lines.
Case example:
ABC at Parts For Carts
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Company’s background:
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Manufactures automobile parts
Two primary customers:
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Automobile manufacturer (Customer 1)
– After-market supplier of auto parts (Customer 2)
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Two primary product lines:
“in house” (Product A)
– “outside suppliers” (Product B)
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Significant impact on PROI:
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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 capitalintensive fabrication activity and high
demand on the packaging and
warehousing/storage activities
PROI analysis:
Product A
Product B
Product Margin
$10.77
$22.06
Return on Sales
21.11%
22.98%
Product ROI
17.06%
37.67%
Significant impact on CROI:
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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).
CROI analysis
Customer 1
Customer Margin
Customer 2
$10.77
$22.06
Return on Sales
20.09%
26.08%
Customer ROI
16.78%
45.64%
The impact of Product and Customer ROI on
Decision Making
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Outsourcing decision
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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
Is asset allocation right for your
organization?
Is asset allocation right for your
organization? (cont’d.)
Conclusions?
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What do you think?
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Useful?
Any flaws in the logic?