ACTIVITY BASED COSTING AND ACTIVITY BASED MANAGEMENT

REVIEWER

PRODUCT VARIETY – refers to the number of different types of products

made
PRODUCT COMPLEXITY – refers to the number of components included in
a product or the number of processes through which a product flows
ABC is a method of allocating indirect factory overhead, indirect selling,
and indirect administrative expenses and all other indirect expenses.
PRODUCTION EVENTS are classified as unit level, batch level, product
level, and facility level events. Each classification of production event is
also called as COST POOL.
Unit cost equals DIRECT COSTS plus INDIRECT PRODUCTION COSTS
DIRECT COST includes DIRECT MATERIALS, DIRECT LABOR, and DIRECT
FACTORY OVERHEAD
INDIRECT PRODUCTION COST is referred to as FACTORY OVERHEAD

VALUE ADDED ACTIVITY ( VA ) – an activity that increases the worth of a

product or service to the consumer and for which the customer is willing
to pay
EX. Processing time/ Service time
NON-VALUE ADDED ACTIVITY ( NVA ) – an activity that increases the time
spent on a product or service but does not increase its worth
EX: Inspection time , Transfer time or Move time, and Idle time
BUSINESS VALUE VALUE ADDED ACTIVITY – an activity that is necessary
for the operation of a business but for which a customer would not want
to pay
EX: preparation of invoices for documenting sales and collections
PROCESS MAP – a detailed flowchart that indicates every step that goes
into making a product or providing a service
VALUE CHART – visual representation that identifies the stages and the
time spent in those stages from the beginning to the end of the process

ACTIVITY AND TIME

4 TYPES OF TIME THAT COMPOSE THE ENTIRE PROCESSING OF AN
ENTITY
1. PROCESSING TIME / SERVICE TIME – the actual time it takes to
perform the functions necessary to manufacture a product or
perform a service
2. INSPECTION TIME – time taken to perform quality control activities
3. TRANSFER TIME/ MOVE TIME – time consumed in moving products
or components from one place to another
4. IDLE TIME – amount of time spent storing inventory or waiting at
production operation for processing

CYCLE / LEAD TIME – from the receipt to completion of an order for

a product or service
CYCLE / LEAD TIME = Value Added Processing Time + Non value
Added Time
 MANUFACTURING CYCLE EFFICIENCY ( MCE )
MCE = Process Time / Manufacturing Cycle Time

SERVICE CYCLE EFFICIENCY ( SCE )

SCE = Actual Service Time / Manufacturing Cycle Time

The NVA activities that create the most cost should be the ones
management focuses its efforts on diminishing or eliminating

COST DRIVER ANALYSIS – the process of investigating, quantifying, and

explaining the relationships of cost drivers and their related costs
COST DRIVERS – the factors having direct cause effect relationship with
costs