Activity Based Costing

Statements on Management Accounting

STRATEGIC COST MANAGEMENT

TITLE

Implementing Activity-Based Costing

CREDITS

IMA would like to acknowledge the work of Gary Cokins (gary.cokins@sas.com),performance management solutions manager, SAS, on whose work this SMA is based and Raef Lawson, research director, IMA, who served as reviewer.

Published by Institute of Management Accountants 10 Paragon Drive Montvale, NJ 07645 www.imanet.org

© 2006 Institute of Management Accounting

Statements on Management Accounting

STRATEGIC COST MANAGEMENT

Implementing Activity-Based Costing

TABLE OF CONTENTS

I. II. III. IV. V. VI. Rationale—What Leads to Interest in ABC? . . . . . . . . . . . . . . . . . . . . . . . . 1 Scope . . . . . . . . . . . . . . . . . . . . . . . . . 2 Defining ABC . . . . . . . . . . . . . . . . . . . . . .3 The Role of the Management Accountant .4 Implementing ABC Involves Behavioral Change Management . . . . . . . . . . . . . . .5 Planning for an ABC Implementation . . . . .6

Exhibits

Exhibit 1: Exhibit 2: Exhibit 3: Exhibit 4: Exhibit 5: Exhibit 6: Exhibit 7: Exhibit 8: Exhibit 9: Exhibit 10: Exhibit 11: Exhibit 12: Exhibit 13: Indirect Costs Are Displacing Direct Costs . . . . . . . . . . . . . . . .2 The Activity-Based Cost Management Framework . . . . . . . . . . . . . . . . . .9 Each Activity Has Its Own Activity Driver . . . . . . . . . . . . . . . . . . . .10 Multi-Level Cost Assignment Flow .12 ABC Cost Assignment Network . . .14 Profitability Profile Using ABC— “Profit Cliff” . . . . . . . . . . . . . . . .15 Fully Traced Costs to a Cost Object . . . . . . . . . . . . . . . . . . . .17 ABC Profit Contribution Margin Layering . . . . . . . . . . . . . . . . . . .19 ABC Customer Profit & Loss Statement . . . . . . . . . . . . . . . . .20 Migrating Customers to Higher Profitability . . . . . . . . . . . . . . . . .21 Process View . . . . . . . . . . . . . . .25 Final Cost Object View . . . . . . . . .26 ABC Rapid Prototyping...