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Strategic Business Management by Gary Cokins

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6

STRATEGIC COST MANAGEMENT FOR PRODUCT PROFITABILITY ANALYSIS

As previously described, some accountants preserve the status quo by defending their simplistic and arbitrary, broadly-averaged cost allocations of expenses without causal relationships as being adequate for product and service line costing and profit analysis. This practice may have been adequate in the past. The use of volume-based cost allocations will provide reasonably accurate, calculated costs only when the following conditions exist:

• Few and very similar products and service lines

• Low amount of indirect and shared expenses

• Homogeneous conversion processes

• Homogeneous channels, customer demands and customers

• Low selling, distribution, customer service and administrative expenses

• Very high profit margins

How many organisations possess those characteristics? Hardly any exist today. Perhaps simple cost allocations worked when Henry Ford was producing thousands of Model-T automobiles, all black, and with minimal indirect overhead expenses, but not anymore. The design and architecture of the activity-based cost management (ABC/M) cost assignment network provides the solution to calculate relatively more accurate costs and profit margins.

ABC/M IS A MULTI-LEVEL COST RE-ASSIGNMENT NETWORK

In complex, support-intensive organisations there can be a substantial chain of indirect and shared activities supporting the direct work activities that eventually trace into the final cost objects. These chains result ...

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