Activity Based Costing

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Confirming Pages C H A P T E R F I V E Activity-Based Costing and Customer Profitability Analysis After studying this chapter, you should be able to . . . LO 5-1 Explain the strategic role of activity-based costing LO 5-2 Describe activity-based costing (ABC), the steps in developing an ABC system, and the benefits of an ABC system LO 5-3 Determine product costs under both the volume-based method and the activity-based method and contrast the two LO 5-4 Explain activity-based management (ABM) LO 5-5 Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations LO 5-6 Use an activity-based approach to analyze customer profitability LO 5-7 Identify key factors for successful ABC/M implementation Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin This chapter has a lot to do with implementing the spirit of Benjamin Franklin’s observation— in cost management terms—that it really does matter how accurately you calculate a cost. Why? Having accurate costs is important for a variety of reasons: a company might find that it has a difficult time determining which of its products is most profitable. Alternatively, it finds its sales increasing but profits declining and cannot understand why. Perhaps the company keeps losing competitive bids for products and services and does not understand why. In many cases, accurate cost information is the answer to these questions. Improved understanding of the use of resources and the assignment of their related costs provides a competitive advantage. It helps a company or organization to develop and to execute its strategy by providing accurate information about the cost of its products and services, the cost of serving its customers, the cost of dealing with its suppliers, and the cost of
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