Fixed costs are defined as those costs that do not vary with changes in the activity level. Some horizontal costfunctions are presented in the top right panel of Exhibit 1-3 to illustrate the idea. However, this does not mean that fixed costs remain constant. If aproduction volume based measure is used as the activity, a cost that changes for some reason other than a change in production activity is considered fixed. Thissimply means that the cost is driven by a non-production volume related phenomenon. For example, property taxes are considered fixed in traditional costaccounting systems that are typically based on production volume related activities. However, property taxes change when the taxing authority changes thetax rate or reassesses the property. The idea to grasp is that the designation of a particular cost as fixed or variable can change when it is analyzed inrelation to a different activity. It is also important to understand that the notion of fixed and variable costs is a short run concept. All costs tend to bevariable in the long run.
Variable costs are those costs that vary with changes in the level of activity. Variable costs tend to increase atvarious rates that generate linear (straight line) or a variety of non-linear cost functions when the costs are plotted on a graph. Some examples areillustrated in the top left panel of Exhibit 1-3. The majoractivity that affects manufacturing costs is production volume, i.e., producing output. Production volume is frequently measured in terms of units produced,direct labor hours used, machine hours used, materials costs or some other production volume related measure. However, other activities that are notrelated to production volume might also be important in analyzing cost behavior. The recognition that non-production volume related activities also cause, ordrive costs is a fundamental idea associated with activity based costing (ABC). ABC is introduced in the next chapter in connection with the various componentsof a cost accounting system and discussed in more detail in .
The Authors present a new methodological approach in stochastic regime to determine the actual costs of an healthcare process. The paper specifically shows the application of the methodology for the determination of the cost of an Assisted reproductive technology (ART) treatment in Italy. The reason of this research comes from the fact that deterministic regime is inadequate to implement an accurate estimate of the cost of this particular treatment. In fact the durations of the different activities involved are unfixed and described by means of frequency distributions. Hence the need to determine in addition to the mean value of the cost, the interval within which it is intended to vary with a known confidence level. Consequently the cost obtained for each type of cycle investigated (in vitro fertilization and embryo transfer with or without intracytoplasmic sperm injection), shows tolerance intervals around the mean value sufficiently restricted as to make the data obtained statistically robust and therefore usable also as reference for any benchmark with other Countries. It should be noted that under a methodological point of view the approach was rigorous. In fact it was used both the technique of Activity Based Costing for determining the cost of individual activities of the process both the Monte Carlo simulation, with control of experimental error, for the construction of the tolerance intervals on the final result.
Cost management is a term that has been popularized by CAM-I (Consortium of Advanced Management - International).Cost management is said to be a more comprehensive concept than cost accounting in that the emphasis is on managing and reducing costs rather than reportingcosts. In other words, it is a long run proactive approach ratherthan a short run reactive approach. For example, a great deal of attention is given to reducing costs at the design stage of a product's life cycle ratherthan simply attempting to measure and control cost during the production stage. James Brimson, who originally served as CAM-I's Cost Management Systems (CMS)project director, defines cost management as, "the management and control of activities to determine an accurate product cost, improve business processes,eliminate waste, identify cost drivers, plan operations, and set business strategies. Based on Brimson's definition, the concept of activitymanagement is part of the cost management discipline originally defined by CAM-I, although the term cost management might be interpreted differently as indicated below.
Activity management, or activity based management, places emphasis on continuously improving the activities and tasks,or work that people perform in an organization. The main idea is to find and eliminate waste. Conceptually, activity management is somewhat different fromcost management in that it focuses on the waste itself, not the cost of waste.It is a process oriented approach rather than an accounting results oriented approach. Activity management also has a long run, rather than a short runemphasis. Although activity management is part of the cost management system (CMS) advocated by CAM-I, it is important to make a distinction between managingcosts (accounting results) and managing activities (processes or work). This distinction is important because placing too much emphasis on costs (or anyother short run results oriented measurement) may cause managers to make decisions that reduce costs, but are not in the best interest of theorganization's long run performance and competitiveness. A few examples include a manager's decision to reduce research and development, employee training, andpreventive maintenance just to improve short term accounting results. This conceptual distinction provides the reason cost management and activitymanagement are presented as separate concepts in Exhibit 1-2.
The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:
(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)
The overhead cost per unit of Product A under the traditional costing system is closest to which value?
Include a cost analysis.
Discuss the 2-3 advantages of the ABC method.
Be sure that the paper has no spelling or grammatical errors.
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To determine a product mix for a production process, this study proposes a mixed-integer programming (MIP) model, based on the time-driven activity-based costing (TDABC) accounting system. By using a time driver from the resource to the cost objects and simultaneously dealing with numerous resource limitations, the model obtains a global optimal decision. The model highlights the difference between supply and the use of the capacity. It avoids some possible limitations of the programming modeling approach when theory of constraints (TOC) or activity-based-costing (ABC) is used. The model is illustrated using a numerical example. In the form of a budgeted income statement, the results for the formulated MIP models that use TOC, ABC and TDABC are compared, in terms of resource-used-based profit, resource-supplied-based profit and cash flow. The proposed MIP model that uses TDABC is shown to support a product mix decision, on which studies of TDABC seldom focus. Implications for the use of this accounting system adoption to determine product-mix are detailed.
Many of the ideas and concepts associated with communitarian capitalism are linked to attempts to develop new and betterapproaches to accounting and management such as activity management, activity costing, activity based product costing (ABC), just-in-time (JIT), investment management, the expanded useof statistical control charts and total quality management (TQM). As weproceed through this textbook we will return to these ideas frequently to emphasize that accounting is not a generic set of rules that fits all firmsunder all circumstances. To be useful to management, internal accounting systems must be designed, and redesigned when necessary, to fit the organization’sstructure, strategy and competitive orientation. Accounting systems that were designed to support an organization competing under the assumptions ofindividualistic capitalism are not likely to be as useful to organizations that are restructuring around the communitarian concepts. Many companies are evolvingin this way, from a system based on individualistic values to a system based on cooperation and teamwork. Accounting scholars agree that accounting systems mustcontinue to evolve to complement these changes. However, questions concerning what to change and how to change it have created a considerable number ofcontroversial issues. We will consider many of these issues in subsequent chapters. (See a ).