Activity - Based Management

CHAPTER 5

Activity-Based Management

After completing this chapter, you should be able to:

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1. Understand the key steps of an activity-based management system.

2. Demonstrate how to use activity-based costing for target costing.

3. Identify and measure the costs of activities that add value or do not add value in organizations.

4. Use the elements of an activity-based management system to help identify opportunities for process improvements.

5. Evaluate capacity utilization by identifying resources supplied and resources used.

6. Understand methods of and problems related to implementing activity-based costing and management.

Cost-Management Challenges

(Solutions are on page 202.)

1. Is implementing activity- based costing enough to improve efficiency? Can cost-management analysts measure costs more accurately using it and, by doing so, ensure that the organization will meet its efficiency goals?

2. Do the numbers “speak for themselves”? Does the cost-management analyst’s responsibility end with making recommendations for improvements?

3. How do you know that activity-based cost- management methods are worthwhile?

PMI, Precision Modeling, Inc.

Dear Sir:

The scene is a meeting of the executive committee of Precision MLeotltdeirng, Inc. (PMI), including Melody Fairchild, chief executive officer; Chad Norris, vice president of manufacturing; and Elizabeth Forney,vice president of marketing. The meeting occurred one year after PMI

Sam R. Leno began supplying MegaBurger Corporation with promotional plastic toys. MegaBurger is one of the world’s largest fast-food chains, and PMI is a leading supplier of plastic products in its geographical region.

Melody Fairchild (CEO): We need to decide whether to continue sup- plying toys to MegaBurger. This business was somewhat profitable last year but not at the level we would like. We must increase our income on the MegaBurger business, or continuing it is simply...