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Strategic Analysis of Operating Income (ABC, ABM & ABB (ABM = Activity…
Strategic Analysis of Operating Income
Strategic Profitability Analysis
Strategies
Cost Leadership
Growth
Product Differentiation
Components
Price Recovery Component
Revenue Effect
= ((Selling price in current year) - (Selling price in last year)) * Actual units of output sold in current year
Cost Effect
Variable costs
= ((Input price in current year) - (Input price in last year)) * Units of input required to produce current year's output in last year
Fixed costs
= ((Price per unit of capacity in current year) - (Price per unit of capacity in last year)) * Actual units of capacity in last year, if adequate to produce current's year output in last year
Productivity Component
Cost Effect
Variable costs
= ((Actual units of input used to produce current's year output) - (Units of input required to produce current year's output in last year)) * Input price in current year
Fixed costs
= ((Actual units of capacity in current year) - (Actual units of capacity in last year, if adequate to produce current year's production in last year)) * Price per unit of capacity in current year
Growth Component
Cost Effect
Variable costs
= ((Units of input required to produce current year output in last year) -(Actual units of input used to produce last year's output)) * Input price in last year
Fixed costs
= ((Actual units of capacity in last year if adequate to produce current year's production in last year) - (Actual units of capacity in last year)) * Price per unit of capacity in last year
Revenue Effect
= ((Actual units of output sold in current year) -(Actual units of output sold in last year)) * Selling price in last year
Profitability Analysis Through Activity Based Costing
Customer Profitability Analysis
Benefits
It helps the supplier to identify which customers are eroding overall profitability and which customers are contributing to it
It can help to provide a basis for constructive dialogue between buyer and seller to improve margins
Direct Product Profitability
DPP Analysis_Cost Categories
Volume Related Cost = The cost is incurred in relation to the space occupied by products. This includes storage and transport costs
Product Batch Cost = This cost is often a time-based cost. If product items ( that is a number of identical products which are handled together as a batch) are stocked on shelves a labour time cost is incurred
Overhead Cost = This is incurred through an activity that is not directly linked to a particular product
Inventory Financing Costs = This is the cost of tying up money in stock and is the cost of the product multiplied by interest rate per day or per week
Benefits
Better pricing decisions
Better management of stores and warehouse space
Better cost analysis
The ratioanalization of product ranges
ABC, ABM & ABB
ABM = Activity Based Cost Management
Business Applications of ABM
Business Process Re-engineering
Benchmarking
Activity Based Budgeting
Key Elements
Quantity of work to be done
Cost of work to be done
Type of work to be done
Performance Measurement
Cost Reduction
Implementing ABM
If integrating ABC into the main cost reporting system is not feasible, consider developing a separate ABC system
The existing information system easily support input requirements
Incorporate ABC methods into organization's financial reporting process
Implementation team should be represented by the people who will be actual users of the ABM information
Top Management support is cited to identify critical information needs
Implement ABM at a high level in order to get concepts across
Decide what are the organisation's most important issues and what types of information would be required to address those issues
Benefits
Provision of clear understanding of the underlying causes of business processing costs
Provision of excellent basis for effectiveness of management decision making
Provides operational management with a clear view of How to implement an Activity Budget?
Identification of key process waster elements, permit management prioritisation and leverage of key resources
Provision of excellent basis and focus for cost reduction
Difference Between ABM and ABC
Analysis
Activity Analysis
Performance Analysis
Value Added Activities
Measures for Determining VA Activities
Is the activity efficiently performed?
If it is useful to adopt budgets, targets, or external benchmarks to establish VA baseline, it is VA
Is an activity sometimes VA and sometimes NVA?
Needless movement of raw material, it is NVA. However, sometime it may be needed to transfer WIP units between production operations, it is VA
Is the activity necessary?
If yes, it is VA
Non-Value Added Activities
Ways in which time is spent
Waiting Time = The amount of time that raw material or WIP spend waiting for the next operation
Storage Time = The time during which materials, partially completed products,or finished goods are held in stock before further processing or shipment
Move Time = The time spent moving raw materials, WIP, or finished goods between operations
Delivery Cycle Time = It is the average time between the receipt of customer order and delivery of the goods
Inspection Time = The amount of time spent confirming that the product is of high quality
Manufacturing Cycle Time = It is the total amount of production time required per unit
Process Time = The time during which a product is undergoing conversion activity
Velocity = It is defined as the number of units produced in a given time
Manufacturing Cycle Efficiency = Processing Time/ (Processing Time + Inspection Time + Waiting Time + Move Time)
Cost Driver Analysis
ABB = Activity Based Budgeting
Key Elements
Quantity of work/activity to be performed
Cost of work/activity to be performed
Type of work/activity to be performed
Activity Flexible Budgeting
Activity Based Costing (ABC)
ABC in Advance Manufacturing Environment
ABC: A Decision - Making Tool
Other decisions that can be assisted by ABC include facility and resources expansion
Decision support for human resources can be augmented by ABC
Wholesale distributors can gain significant advantage in the decision-making process through implementation of ABC concepts
ABC is a complement of Total Quality Management (TQM)
Companies who wish to determine price based on cost plus markup basis find ABC method of costing very relevant and are able to determine competitive prices for their products
Using traditional absorption costing, overheads may get disturbed equally across all product lines