Effective Activity-Based-Costing and Optimal Cost Management

How do firms choose their overhead cost assignment? How do firms choose optimal cost management based on critical production activities that create and capture values? What is the nature and function of expense assignment? What are sources of expense indicators or cost drivers? What are some policy implications of the Activity Based Costing in formulating effective cost assignment and cost management strategies?

These managerial accounting questions relate to effective cost assignment and optimal cost management strategies of a business enterprise-the appropriate mix of costs management strategies that maximizes the return on investment and shareholders’ wealth while minimizing the cost of operations, simultaneously.

The correlation between optimal cost management and effective activity-based costing is critical to sound business strategic options designed to maximize the wealth producing capacity of the enterprise. In these series on effective cost assignment and optimal cost management, we will focus on the pertinent strategic cost questions and proffer some operational guidance.

The overriding purpose of this review is to highlight some basic cost theory, strategic costs relationships, and industry best practices in effective cost assignment designed to optimize cost management. For firm-specific cost management strategies, please consult a competent professional.

Activity-based costing (ABC) is an effective management technique for assigning and controlling the overhead costs. Overhead expense analysis and assignment can be made more accurate by using ABC techniques for a wide range of products, for product expenses and profitability analysis and for appropriate distribution and control of the overheads.

Please note that the optimal cost management and effective activity based costing for each firm differs markedly based on overall industry dynamic, market structure-degree of competition, height of entry/exit barriers, market contestability, stage of industry life cycle, and its market competitive position. Indeed, as with most market performance indicators firm-specific cost management position is insightful only in reference to the industry expected value (average) and generally accepted industry benchmarks and best practices.

Phases of Cost Assignment:

In the first phase, major activities for manufacturing or sale of finished products are properly identified and classified according to the expenditure hierarchy. Expenditure hierarchy facilitates classification of activities based on the ease with which they are traceable to a product or product lines. Such activities may include material procurements, production runs, material handling, order processing, inventory management, warehousing, and transportation.

In the second stage, activity expenditures are assigned to each product or product lines and cost indicators or cost drivers, and overheads are listed in accordance with the major activities required to create and capture values. A brief review of the extant academic literature suggests that the nature of production activity or transaction decides appropriate expense indicators or expense drivers.

Activity-based costing system uses an appropriate cost driver that differs with the nature of production activities that create expenses. Additionally, there are several levels of activities: Unit level, batch level, product level and facility level. Moreover, facility level activities are carried out at the plant level and a bit difficult to trace while unit-level activities are product-specific and most easily traceable to products.

In practice, proper identification and careful analysis of cost incurred for each cost pool are required and critical for appropriate cost driver rate determination. Finally, firms trace and allocate the cost of activities or operations to the final products-goods and services. As you know, cost tracing is the process of directly matching an expense with a product being produced, where expense allocation uses estimates to apply costs to products or product lines. While many costs can be allocated to products directly, some costs relate to multiple products or change on a per-unit basis and should be allocated proportionately.

Some Operational Guidance:

Effective cost assignments require management accounting staff to identify the objects to which the relevant costs will be assigned, accumulate the relevant costs in different cost pools, and identify the most appropriate basis/method for allocating relevant costs. Please note that not all expenditures are relevant and expense controls are subject to vertical differentiation-level organizational authority.

Additionally, not all expenses should be unitized. For example, fixed costs do not change with an increase or decrease in the quantity of goods or services produced or sold. Indeed, fixed costs are expenses that must be paid by firms, independent of any business activity within a specific scale of production. Therefore, it may be misleading to unitize fixed costs of production, ceteris paribus.

To formulate optimal cost assignment strategies, management should understand and anticipate some challenges derivative of expense allocation and activity based costing. Some of these challenges include: traceability, materiality, method, accuracy, and timeliness. As I have already explained, some expenses are not easy to trace. Appropriate expenditure identification, analysis, tracing and assignment should be conducted using multiple methods and defensible assumptions.

In practice, expenses allocation are data driven and managerial analytics aided by computer technology. However, sound analysis of expense drivers and assignments, should be guided by full grasp of well-established cost theory and generally accepted accounting principles. For example, when examining cost tracing and assignment, firms should determine how closely to allocate individual expenses. With modern computer systems and cost analytics, it is often possible to trace every expense driver even when there are multiple products -goods and services.

Further, not all expenditures are material. And because there are costs and benefits associated with search, analysis and assignment of expense data, firms must decide to what extent to account for expense drivers. This is the accounting concept of materiality. Firms must always weigh the costs and benefits of all managerial decisions. Business managers must decide whether the benefits justify the costs and what amount of cost analytics is optimal as it pertains to firm profitability.

Finally, firms should create and maintain multiple costing systems. And use appropriate techniques such as traditional costing, job-order costing, process costing, or variable costing to facilitate internal managerial decision making and external financial reporting requirements. Please note that variable costing is not permissible for external reporting but may be useful in assisting managers to make resource allocation and other business decisions, efficiently and effectively. Often, successful businesses maintain managerial accounting costing systems to facilitate internal planning and financial accounting costing systems designed to support the external financial reporting function.

In sum, cost accounting systems and activity based costing facilitate accurate estimation of expenses of products-goods and services which is critical for profitable business operations. Business managers should know, understand, and anticipate which products are profitable and which products are not profitable. Therefore, cost analytics must be relevant, accurate, timely, and consistent with the calculus of economic advantage. To create and sustain competitive advantage in the global marketplace, firms need effective identification of cost drivers, cost assignment and optimal expenditure management strategies-the appropriate mix of expenditures management strategies that maximizes the return on investment and shareholders’ wealth while minimizing the cost of operations, simultaneously.

5 Steps To Maximum Productivity

Do you know that you get 80% of your results from just 20% of your time and effort and consequently 80% of your time is virtually wasted on non productive activities?. Once you realize this it is easy to take advantage and either reduce the hours you work or significantly improve your productivity.

The 80-20 rule was first discovered by Italian economist Vilfredo Pareto a hundred years ago. Using this knowledge is incredibly powerful in combating the “not enough hours in the day” mentality of today’s society.

The 80-20 rule means that in any area of our lives, literally 80 percent of our fruits are derived from only 20 percent of doing “what matters”. In other words, there is only a very small portion of all that we do each day, regardless of the situation, that brings us the “higher return”.

How can you benefit from being aware of this principle? Implementing a strategy based on the 80-20 rule can result in greater wealth and greater leisure time? Just imagine how productive you will be if 80% of your time could be spent on productive activities. You have to realise that the things that matters most should never be at the mercy of activities that matter least.

Here are 5 Steps to maximise your productivity:

1) Keep a work log for at least a week

Write down all of your activities and the time spent doing them. I appreciate this is time consuming initially but it is essential you get a true picture of your working week.

2) Analyse your activities

Separate your activities into high priority – those that produce a return or where only you have the skills to do the work – and low priority – activities others can do where the activity can be delegated to support staff. You will almost certainly find that you are spending most of your time on low-priority activities rather than activities directly providing a return. In almost all businesses these non productive activities tend to absorb time at a far greater rate than they should.

3) Delegate non productive activities

Once you can identify the low priority activities delegate as many as possible to support staff providing training where required. If necessary employ an additional member of staff to take responsibilities – the cost will be more than offset by your improved productivity. There may be a number of low priority activities you are tempted to keep. Unless it is absolutely unavoidable don’t be tempted and don’t get involved in non productive activities or your productivity will fall.

4) Calculate the time required for any remaining low priority activities

Once you have delegated all that you can, your next step is to calculate how much time you should be spending on the remaining low priority activities to make maximum use of your productive time. Do not work disproportionately hard at these low priority activities and set aside specific time each day or week to complete them.

5) Prioritise your remaining activities

Once you have cleared out the activities that do not bring you any return, it is time to turn your attention to the activities in your life that are bringing the most reward. Prioritise your activities and concentrate most of your time just on a few high-priority activities.

The objective throughout is to maximize your results from the areas of high return and to delegate those activities that have a low return. Having to spend a disproportionate amount of time on non productive activities is a major source of stress for many businessmen. Delegating these activities will therefore have the added benefit of reducing the stress you are under. It is all about doing less work for greater return.

For more success in life, whether that is more money, more time with your family or just making time for golf you should start implementing the 80-20 rule immediately. It will help your career as well as your personal life and, as a bonus, following the 80-20 rule day in and day out can make you very wealthy over the long term.

What Is Productive Activity?

When we think of activity usually as a sporting activity, where people participate in more physically energetic sports as fun and to test our competitive ability; such as in playing tennis, ice and field hockey and football.

However, the term ‘activity’ can also mean anything that uses physical movement of our limbs to create muscular action, plus using coordination and strength to move our muscles and skeletal joints around with an element of skill.

This can be for are other sporting activities such as curling, recreational activities such as bowls, hobby activities such as needlecraft, work activities such as woodwork and so on. They are all under the umbrella of productive activities, because there is a purpose of creating something for the goal during the activity.

Playing any type of games is productive, because the aim is to win the game, which also provides competitiveness, socialization and brain stimulation for testing our mental acuity, through concentration and skill, more than muscular strength and fitness.

Sporting activities need practise for obtaining greater strength and skill, with the aim to become better than the opponent for winning the ultimate prize that brings prestige and honor.

The focus on daily productive activities is different in because they are a repetitious activity performed daily so that little physical or cognitive effort is put into them as repeat them each day.

It means our physical and cognitive actions have little concentrated effort, because we do them without even thinking about how we perform them.

We call these tasks daily living activities, or functional performance activities; which are completed for enabling personal autonomy and independence in daily living.

Maintaining our functional independence in daily living is the most important aspect of personal control that we have, because if we are not able to be independent; then we lose the ability to control of our own personal life. If we ever become very sick, we may end up in hospital, because we are unable to take care of ourselves.

Hospitals remove our personal control, in order to take care of our medical problems. Hospitals, like all institutions are organized on tight schedules; with meals at a specific times, visitors at other times and doctor’s visits always in the morning.

They provide very little personal control to the ‘consumer, or the patient; until you are able to return home and only then is control reinstated. It means you can return to living a full and active life as you choose, through independence and autonomy.

If you are not able to achieve this ability, it means that your health will be poor and you are unable to take care of yourself. It may mean that you need to be looked after by other people and which means institutional care in either a hospital or nursing home.

All types of productive activity are used to help you live an independent and autonomous life. This is your ultimate goal in daily living, because without this ability; you will not be in control of the choices you make in living your own life.

Enabling productively, safe activity cannot be over-emphasized, because if we ever become so seriously physically impaired with functional limitations; which can happen if we gain too much weight. Our physical health will suffer and we lose our ability to maintain our personal independence in our daily functional activities. Losing any of these tasks is the first step to losing control of our daily life.

Our goal as human beings is to remain productively active in everything we do, so that we remain independent, participatory and functional, in order to be a holistically, self-fulfilled person.

Productive Activities to Engage in If You’re Bored at Home

How productive are you on a day-to-day basis?

Whether you’re an established entrepreneur or just breaking out of the corporate office, how productive you are now can make a huge impact on the results you see later. If you feel swamped with projects, aren’t making any progress or find yourself lacking time for other things (hobbies, friends or family), you probably aren’t being productive with your time.

Productivity is all about getting results.

But managing your time isn’t always easy, especially at home where you’re the most prone to distractions. Something unexpected is bound to happen or an emergency will occur, and it will knock your schedule off track. Other times, you just won’t feel motivated to get anything done at all.

While you can’t control every situation, you still can get more done around the house and spend more time with the people you love.

Let’s look at a few ways to do just that.

  • Be smart about watching TV.By combining your TV habits with other activities, you can actually make major headway on your business and lifestyle goals. The next time you sit down to watch your favorite show, consider using that time to burn some extra calories (exercise in front of the TV), plan out the rest of the week (what meal are you going to make for dinner?) or answer email. What you watch on TV can also inspire new ideas and educate your mind. But be careful what you watch! I’m personally addicted to watching anything from WWII battles to the advancement in space, technology and health on the Discovery Channel. On the other hand, I avoid reality TV as much as possible; it isn’t realistic, and it’s often a waste of time.
  • Listen to something inspirational while you clean.Mindless chores (like sweeping, doing the dishes or preparing meals) have to be done, but that doesn’t mean you can’t make the most of your time while doing them. I love listening to inspirational CDs or books on tape while completing chores around the house. That way, my mind is still constantly developing new ideas.
  • Spend quality time with family.It’s not healthy to work all of the time. Taking occasional breaks will reduce stress from work, so why not spend that time you do have with your family? Playing catch with your son, watching a movie with your spouse or calling your brother to see how he’s doing will help foster stronger relationships and create tighter family bonds.
  • Add exercise to your morning routine.Exercising regularly won’t just make you healthy, but exercise is a major source of energy as well. By consistently spending 10-30 minutes exercising three days per week, coffee will become less of a necessity and you’ll have more energy to devote to work, friends, family and personal hobbies. You don’t even have to have a gym membership. Instead of driving to the gym, I’ll often pop in an Insanity fitness CD.
  • Brainstorm new ideas.Is a project due soon for a client? Consider brainstorming ideas and mapping out possible solutions to any problems you may have. If the project requires multiple steps, make a to-do list. You can also use to-do lists for shopping or tasks around the house, as well as for planning upcoming events and special occasions.
  • Keep things organized.It’s hard to stay productive if you’re working in a messy or disorganized environment. Take some time to organize your closet, office or kitchen, putting anything away that seems out of place. You can also take this time to clean out your purse or wallet, and get rid of any junk you might have thrown in on the go.
  • Get motivated.If you’re stuck while working on a project for a client or just want to take a break from work, consider picking up an inspirational book to give your mind the boost it needs to keep going. Success stories, case studies, blog posts and podcasts can all be good sources of motivation whenever you feel stressed or discouraged and start to procrastinate.
  • Update your finances.If you find yourself lacking something to do, have a look at some outstanding bills that need to be paid, reassess your budget, balance your checkbook or organize your recent transactions so that you don’t fall behind in your finances.

Not all day-to-day routines will go to plan, but with a little bit of time and patience, you can achieve a productive lifestyle, reduce stress and feel more in control over your life in the long run.