for the writer Finance guru only
blank87
l03-activity_based_costing_edited.ppt
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- This topic describes how ABC systems help companies make better pricing and product mix decisions.
- It illustrates how ABC assists in cost management decisions by improving processes and product designs.
- This topic also show how ABC provides managers with cost information for strategic and other decisions
- IT has made the necessary detailed tracking of cost in a cost-effective and affordable way
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- Under-and over-costing revisited
- Activity Based Costing (ABC)
- Indicators of need for ABC
- Implementing ABC
- Difference between ABC and Traditional Product Costs
- Activity Based Management (ABM)
- Value and non-value added costs
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- Product under-costing:
A product consumes a relatively high level of overhead costs but is reported to have a relatively low total cost.
- Product over-costing:
A product consumes a relatively low level of overhead costs but is reported to have a relatively high total cost.
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- Why does it happen?
- Traditional costing uses a single cost pool and averages the allocation of overheads.
- Traditional costing uses labour as the main cost driver.
- Common-type products tend to require less overhead inputs than more complex products.
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- ABC systems refine costing systems by focusing on individual activities as the fundamental cost object.
- ABC calculates the costs of individual activities and assigns costs to cost objects such as products and services on the basis of the activities undertaken to produce each product or service.
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The Past
Small number of products which did not differ much in required manufacturing support.
Labor was the dominant element in the cost structure.
The Present
Numerous products with more and complicated production requirements.
Labor is becoming an ever smaller part component of total production costs.
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Line managers do not
believe the product
costs reports
Marketing does not
use costs reports for
pricing decisions
Product-line profit
margins are hard
to explain
Sales are increasing,
but profits are declining.
Some products that
have reported high
profit margins are not
sold by competitors
Direct labor is a
small percentage
of total costs
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Terrabyte produces three complex printed circuit boards referred to as Basic, Intermediate, and Advanced.
The following information is obtained from company records:
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Sheet1
| Basic | Intermediate | Advanced | ||
| Production: | ||||
| Units | 10,000 | 20,000 | 4,000 | |
| Runs | 1 of 10,000 | 4 of 5,000 | 10 of 400 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Additional information includes:
Manufacturing overhead is determined as follows
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Sheet1
| Basic | Intermediate | Advanced | ||
| Direct materials | $ 50.00 | $ 90.00 | $ 20.00 | |
| Direct labor (hr/board) | 3 | 4 | 2 | |
| Setup time (hr/run) | 10 | 10 | 10 | |
| Machine time (hr/board) | 1 | 1.25 | 2 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Basic | Intermediate | Advanced | ||
| Direct materials | $ 50.00 | $ 90.00 | $ 20.00 | |
| Direct labor | 60.00 | 80.00 | 40.00 | |
| Manufacturing overhead | 99.00 | 132.00 | 66.00 | |
| Total | $ 209.00 | $ 302.00 | $ 126.00 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Budgeted manufacturing overhead $3,894,000
Budgeted direct-labor hours 118,000
= $33 per hour
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Sheet1
| Basic | Intermediate | Advanced | ||
| Units produced | 10,000 | 20,000 | 4,000 | |
| Direct labor (hr/unit) | 3 | 4 | 2 | |
| Total hours | 30,000 | 80,000 | 8,000 | |
| Total hours required | 118,000 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Basic | Intermediate | Advanced | ||
| Direct labor (hr/unit) | 3 | 4 | 2 | |
| Overhead rate per hour | $ 33 | $ 33 | $ 33 | |
| Overhead per unit | $ 99 | $ 132 | $ 66 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
With these product costs, Terrabyte established target selling prices (Cost × 125%).
209.00 x 1.25
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Sheet1
| Basic | Intermediate | Advanced | ||
| Direct materials | $ 50.00 | $ 90.00 | $ 20.00 | |
| Direct labor | 60.00 | 80.00 | 40.00 | |
| Manufacturing overhead | 99.00 | 132.00 | 66.00 | |
| Total | $ 209.00 | $ 302.00 | $ 126.00 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Basic | Intermediate | Advanced | ||
| Cost per unit | $ 209.00 | $ 302.00 | $ 126.00 | |
| Target selling price | 261.25 | 377.50 | 157.50 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Terrabyte wishes to see what target selling prices would be suggested if Activity-Based Costing was used.
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- Step 1: Define activities, activity cost pools, and activity measures.
- Step 2: Assign overhead costs to activity cost pools.
- Step 3: Calculate activity rates.
- Step 4: Assign overhead costs to cost objects using the activity rates and activity measures.
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- ABC systems commonly use a four-part cost hierarchy to identify cost-allocation bases:
Unit-level cost
Batch level costs
Product-sustaining costs
Facility-sustaining costs
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are resources sacrificed on activities performed on each individual unit of product or service.
- Energy
- Machine depreciation
- Repairs
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are resources sacrificed on activities that are related to a group of units of product(s) or service(s) rather than to each individual unit of product or service.
- Set-up hours
- Procurement costs
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or service-sustaining, costs are resources sacrificed on activities undertaken to support individual lines of products or services.
- Design costs
- Engineering costs
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are resources sacrificed on activities that cannot be traced to individual products or services but support the organisation as a whole.
- General administration
Rent
Building security
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Activity Cost Pool :
a “bucket” in which
costs that relate to a
single activity
measure in the ABC
system are
accumulated.
$
$
$
$
$
$
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A homogeneous cost pool is a grouping of overhead costs in which each cost component is consumed in roughly the same proportion by the product line.
A homogeneous cost pool
uses a single cost driver.
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In selecting a cost driver, we must consider the
following: p.178-179
Degree of
Correlation
Cost of
Measurement
Behavioral
Effects
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Overhead Costs
Total budgeted cost = $3,894,000
Activity
Cost
Pools
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Facility
cost pool
$507,400
Unit
Level
Batch
Level
Product-
Sustaining
Level
Facility
Level
Identification
of Activity
Cost Pools
Activity
must be
done on
each unit
produced.
Activity
performed
on each
batch
produced.
Activities needed to support
an entire product line
Activity required in order
for the production
process to occur.
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Receiving/Inspection
cost pool $200,000
Material-Handling
cost pool $600,000
Quality-Assurance
cost pool $421,000
Packaging/Shipping
cost pool $250,000
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Facility
cost pool
$507,400
Unit
Level
Batch
Level
Product-
Sustaining
Level
Facility
Level
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Various overhead
costs related
to machinery
Maintenance
Depreciation
Computer Support
Lubrication
Electricity
Calibration
Machinery Cost Pool
Total budgeted cost = $1,212,600
Activity
cost
pool
*
Calculate
the pool
rate
Budgeted Machinery Costs $1,212,600
Budgeted Machine Hours 43,000
$28.20/hour
Cost
Assignment
=
=
*
Sheet1
| Basic: | |||
| $28.20 | per hr. | ||
| 1 | hr. per unit | ||
| $28.20 | per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Intermediate: | |||
| $28.20 | per hr. | ||
| 1.25 | hr. per unit | ||
| $35.25 | per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Advanced: | |||
| $28.20 | per hr. | ||
| 2 | hr. per unit | ||
| $56.40 | per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Calculation of
total setup cost
Setup Cost Pool
Total budgeted cost = $3,000
Activity
cost
pool
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Sheet1
| Total budgeted setup cost | |||
| $20 | per hour | ||
| 10 | hr. per setup | ||
| $200 | cost per setup | ||
| 15 | production runs | ||
| $ 3,000 | Total |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Calculate
the pool
rate
Budgeted Setup Costs $3,000
Planned Production Runs 15 runs
$200 per run
Cost
Assignment
=
=
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Sheet1
| Basic: (1 Run) | ||
| $200 per run | ||
| 10,000 units per run | ||
| = | $.02 per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Intermediate: (4 Runs) | ||
| $200 per run | ||
| 5,000 units per run | ||
| = | $.04 per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Advanced: (10 Runs) | ||
| $200 per run | ||
| 400 units per run | ||
| = | $.50 per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Various overhead
costs related
to engineering
Engineering salaries
Engineering supplies
Engineering software
Depreciation
Engineering Cost Pool
Total budgeted cost = $700,000
Activity
cost
pool
*
Allocate based
on engineering
transactions
Cost
Assignment
Engineering Cost Pool
Total budgeted cost = $700,000
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Sheet1
| Basic: | ||
| 25% × $700,000 | ||
| 10,000 units | ||
| = | $17.50 per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Intermediate: | ||
| 45% × $700,000 | ||
| 20,000 units | ||
| = | $15.75 per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Advanced: | ||
| 30% × $700,000 | ||
| 4,000 units | ||
| = | $52.50 per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Various overhead
costs related
to general
operations
Plant depr.
Plant mgmt.
Plant maint.
Property taxes
Insurance
Security
Facility Cost Pool
Total budgeted cost = $507,400
Activity
cost
pool
*
Calculate
the pool
rate
Budgeted Facilities Cost $507,400
Budgeted Direct-Labor Hours 118,000
$4.30/hour
Cost
Assignment
=
=
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Sheet1
| Basic: | |||
| $4.30 | per hr. | ||
| × | 3 | hr. per unit | |
| $12.90 | per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Intermediate: | |||
| $4.30 | per hr. | ||
| × | 4 | hr. per unit | |
| $17.20 | per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Advanced: | |||
| $4.30 | per hr. | ||
| × | 2 | hr. per unit | |
| $8.60 | per unit |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Here are the new product costs so far . . .
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Sheet1
| Basic | Intermediate | Advanced | |||||
| Direct materials | $ 50.00 | $ 90.00 | $ 20.00 | ||||
| Direct labor | 60.00 | 80.00 | 40.00 | ||||
| Machinery | 28.20 | 35.25 | 56.40 | ||||
| Setup | 0.02 | 0.04 | 0.50 | ||||
| Engineering | 17.50 | 15.75 | 52.50 | ||||
| Facilities | 12.90 | 17.20 | 8.60 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
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Sheet1
| Receiving and Inspection Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 200,000 | × | 6% | ÷ | 10,000 | = | $ 1.20 | |
| Intermediate | 200,000 | × | 24% | ÷ | 20,000 | = | 2.40 | |
| Advanced | 200,000 | × | 70% | ÷ | 4,000 | = | 35.00 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Material-Handling Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 600,000 | × | 7% | ÷ | 10,000 | = | $ 4.20 | |
| Intermediate | 600,000 | × | 30% | ÷ | 20,000 | = | 9.00 | |
| Advanced | 600,000 | × | 63% | ÷ | 4,000 | = | 94.50 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Quality-Assurance Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 421,000 | × | 20% | ÷ | 10,000 | = | $ 8.42 | |
| Intermediate | 421,000 | × | 40% | ÷ | 20,000 | = | 8.42 | |
| Advanced | 421,000 | × | 40% | ÷ | 4,000 | = | 42.10 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Packaging and Shipping Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 250,000 | × | 4% | ÷ | 10,000 | = | $ 1.00 | |
| Intermediate | 250,000 | × | 30% | ÷ | 20,000 | = | 3.75 | |
| Advanced | 250,000 | × | 66% | ÷ | 4,000 | = | 41.25 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
$14.82
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Sheet1
| Packaging and Shipping Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 250,000 | × | 4% | ÷ | 10,000 | = | $ 1.00 | |
| Intermediate | 250,000 | × | 30% | ÷ | 20,000 | = | 3.75 | |
| Advanced | 250,000 | × | 66% | ÷ | 4,000 | = | 41.25 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Quality-Assurance Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 421,000 | × | 20% | ÷ | 10,000 | = | $ 8.42 | |
| Intermediate | 421,000 | × | 40% | ÷ | 20,000 | = | 8.42 | |
| Advanced | 421,000 | × | 40% | ÷ | 4,000 | = | 42.10 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Receiving and Inspection Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 200,000 | × | 6% | ÷ | 10,000 | = | $ 1.20 | |
| Intermediate | 200,000 | × | 24% | ÷ | 20,000 | = | 2.40 | |
| Advanced | 200,000 | × | 70% | ÷ | 4,000 | = | 35.00 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
| Material-Handling Cost Pool | ||||||||
| Board | Overhead | × | % | ÷ | Units | = | Cost/Unit | |
| Basic | $ 600,000 | × | 7% | ÷ | 10,000 | = | $ 4.20 | |
| Intermediate | 600,000 | × | 30% | ÷ | 20,000 | = | 9.00 | |
| Advanced | 600,000 | × | 63% | ÷ | 4,000 | = | 94.50 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
These are the new product costs when Terrabyte uses ABC.
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Sheet1
| Basic | Intermediate | Advanced | |||||
| Direct materials | $ 50.00 | $ 90.00 | $ 20.00 | ||||
| Direct labor | 60.00 | 80.00 | 40.00 | ||||
| Machinery | 28.20 | 35.25 | 56.40 | ||||
| Setup | 0.02 | 0.04 | 0.50 | ||||
| Engineering | 17.50 | 15.75 | 52.50 | ||||
| Facilities | 12.90 | 17.20 | 8.60 | ||||
| Other | 14.82 | 23.57 | 212.85 | ||||
| Total | $ 183.44 | $ 261.81 | $ 390.85 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Both original and ABC target selling prices are based on (Cost × 125%).
The selling price of Basic and Intermediate are lower
and the selling price for Advanced is higher using ABC.
[$209.00 × 1.25]
[$183.44 × 1.25]
*
Sheet1
| Basic | Intermediate | Advanced | ||
| Traditional costing | $ 209.00 | $ 302.00 | $ 126.00 | |
| ABC costing | 183.44 | 261.81 | 390.85 | |
| Original target selling price | 261.25 | 377.50 | 157.50 | |
| ABC target selling price | 229.30 | 327.26 | 488.56 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Can you identify any problems Terrabyte is likely to face as a result of this distortion?
Traditional costing understates the cost
of complex, low volume products.
*
Sheet1
| Basic | Intermediate | Advanced | ||
| Traditional costing | $ 209.00 | $ 302.00 | $ 126.00 | |
| ABC costing | 183.44 | 261.81 | 390.85 | |
| Cost distortion per unit | 25.56 | 40.19 | (264.85) | |
| Units produced | 10,000 | 20,000 | 4,000 | |
| Total cost distortion | 255,600 | 803,800 | (1,059,400) |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Batch-level or product-level costs will ordinarily shift from high-volume products produced in large batches to low-volume products produced in small batches.
*
Activity-based costing establishes relationships
between overhead costs and activities so that
we can better allocate overhead costs.
Activity-based management focuses
on managing activities to reduce costs.
*
- ABC gives management insight into the cost structures for making and selling diverse products.
- It provides more accurate product cost information and more detailed information on costs of activities and the drivers of those costs.
*
- Manufacturing and distribution personnel use ABC systems to focus on cost reduction efforts through knowledge gained on significant activities and their related cost.
*
- A value-added cost is a cost that customers perceive as adding value, or utility, to a product or service:
Adequate memory
Pre-loaded software
Reliability
Easy-to-use keyboards
*
- A non value-added cost is a cost that customers do not perceive as adding value, or utility, to a product or service.
Cost of expediting
Rework
Repair
(See p.183 for how to identify N-V-A activities)
*
Identify Activities.
Identify Non-Value-Added Activities.
Understand Activity Linkages, Root Causes, and Triggers.
P.184
Establish Performance Measures.
Report Non-Value-Added Costs.
Specify
parts
Select
vendor
Receive
parts
Produce
goods
Inspect
finished
goods
Rework
defective
products
*
Activity
Reduction
Activity
Elimination
Activity
Selection
Activity
Sharing
Reduce
Non-Value-Added
Costs
*
Why do organizations have incentives
to eliminate non-value added activities?
Competitors are constantly striving
to create more value for customers at lower cost
The organization can apply the freed- up resources to value-added activities or distribute them to the employees of the
organization.
Competition can appear quickly
*
Thank goodness
for IT…….
*
BasicIntermediateAdvanced
Production:
Units10,000 20,000 4,000
Runs1 of 10,0004 of 5,00010 of 400
BasicIntermediateAdvanced
Direct materials50.00$ 90.00$ 20.00$
Direct labor (hr/board)3 4 2
Setup time (hr/run)10 10 10
Machine time (hr/board)1 1.25 2
BasicIntermediateAdvanced
Direct materials50.00$ 90.00$ 20.00$
Direct labor60.00 80.00 40.00
Manufacturing overhead99.00 132.00 66.00
Total209.00$ 302.00$ 126.00$
BasicIntermediateAdvanced
Units produced10,000 20,000 4,000
Direct labor (hr/unit)3 4 2
Total hours30,000 80,000 8,000
Total hours required118,000
BasicIntermediateAdvanced
Direct labor (hr/unit)3 4 2
Overhead rate per hour33$ 33$ 33$
Overhead per unit99$ 132$ 66$
BasicIntermediateAdvanced
Direct materials50.00$ 90.00$ 20.00$
Direct labor60.00 80.00 40.00
Manufacturing overhead99.00 132.00 66.00
Total209.00$ 302.00$ 126.00$
BasicIntermediateAdvanced
Cost per unit209.00$ 302.00$ 126.00$
Target selling price261.25 377.50 157.50
Basic:
$28.20per hr.
1 hr. per unit
$28.20per unit
$28.20per hr.
1.25 hr. per unit
$35.25per unit
Intermediate:
$28.20per hr.
2 hr. per unit
$56.40per unit
Advanced:
Total budgeted setup cost
$20per hour
10 hr. per setup
$200cost per setup
15 production runs
3,000$ Total
Basic: (1 Run)
=$.02 per unit
$200 per run
10,000 units per run
=$.04 per unit
$200 per run
5,000 units per run
Intermediate: (4 Runs)
Advanced: (10 Runs)
=$.50 per unit
$200 per run
400 units per run
Basic:
=$17.50 per unit
25% × $700,000
10,000 units
Intermediate:
=$15.75 per unit
45% × $700,000
20,000 units
Advanced:
=$52.50 per unit
30% × $700,000
4,000 units
Basic:
$4.30per hr.
×3 hr. per unit
$12.90per unit
Intermediate:
$4.30per hr.
×4 hr. per unit
$17.20per unit
Advanced:
$4.30per hr.
×2 hr. per unit
$8.60per unit
BasicIntermediateAdvanced
Direct materials50.00$ 90.00$ 20.00$
Direct labor60.00 80.00 40.00
Machinery28.20 35.25 56.40
Setup0.02 0.04 0.50
Engineering17.50 15.75 52.50
Facilities12.90 17.20 8.60
BoardOverhead×%÷Units=Cost/Unit
Basic200,000$ ×6%÷10,000 =1.20$
Intermediate200,000 ×24%÷20,000 =2.40
Advanced200,000 ×70%÷4,000 =35.00
Receiving and Inspection Cost Pool
BoardOverhead×%÷Units=Cost/Unit
Basic600,000$ ×7%÷10,000 =4.20$
Intermediate600,000 ×30%÷20,000 =9.00
Advanced600,000 ×63%÷4,000 =94.50
Material-Handling Cost Pool
BoardOverhead×%÷Units=Cost/Unit
Basic421,000$ ×20%÷10,000 =8.42$
Intermediate421,000 ×40%÷20,000 =8.42
Advanced421,000 ×40%÷4,000 =42.10
Quality-Assurance Cost Pool
BoardOverhead×%÷Units=Cost/Unit
Basic250,000$ ×4%÷10,000 =1.00$
Intermediate250,000 ×30%÷20,000 =3.75
Advanced250,000 ×66%÷4,000 =41.25
Packaging and Shipping Cost Pool
BoardOverhead×%÷Units=Cost/Unit
Basic250,000$ ×4%÷10,000 =1.00$
Intermediate250,000 ×30%÷20,000 =3.75
Advanced250,000 ×66%÷4,000 =41.25
Packaging and Shipping Cost Pool
BoardOverhead×%÷Units=Cost/Unit
Basic421,000$ ×20%÷10,000 =8.42$
Intermediate421,000 ×40%÷20,000 =8.42
Advanced421,000 ×40%÷4,000 =42.10
Quality-Assurance Cost Pool
BoardOverhead×%÷Units=Cost/Unit
Basic200,000$ ×6%÷10,000 =1.20$
Intermediate200,000 ×24%÷20,000 =2.40
Advanced200,000 ×70%÷4,000 =35.00
Receiving and Inspection Cost Pool
BoardOverhead×%÷Units=Cost/Unit
Basic600,000$ ×7%÷10,000 =4.20$
Intermediate600,000 ×30%÷20,000 =9.00
Advanced600,000 ×63%÷4,000 =94.50
Material-Handling Cost Pool
BasicIntermediateAdvanced
Direct materials50.00$ 90.00$ 20.00$
Direct labor60.00 80.00 40.00
Machinery28.20 35.25 56.40
Setup0.02 0.04 0.50
Engineering17.50 15.75 52.50
Facilities12.90 17.20 8.60
Other14.82 23.57 212.85
Total183.44$ 261.81$ 390.85$
BasicIntermediateAdvanced
Traditional costing209.00$ 302.00$ 126.00$
ABC costing183.44 261.81 390.85
Original target selling price261.25 377.50 157.50
ABC target selling price229.30 327.26 488.56
BasicIntermediateAdvanced
Traditional costing209.00$ 302.00$ 126.00$
ABC costing183.44 261.81 390.85
Cost distortion per unit25.56 40.19 (264.85)
Units produced10,000 20,000 4,000
Total cost distortion255,600 803,800 (1,059,400)
Once non-value-added activities have been id entified, four
techniques may be used to reduce the resulting non -value-
added costs.
• Activity reduction. This technique simply scales back the
activity, by reducing the time or other resources devoted to it.
• Activity elimination. This approach assumes the activity is
utterly unnecessary.
• Activity selection. Under this strategy, the most efficient
activity is selected from a set of alternatives.
• Activity sharing. This technique finds ways to get more
mileage out of an existing activity by combining functions in a
more efficient manner. An example is the use of common parts
in several related products, rather than designing each product
to use unique parts.
