ABC Action Analysis Appendix 6A PowerPoint Authors: Susan

ABC Action Analysis Appendix 6A PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved. 6A-2 Learning Objective 6-6 (Appendix 6A) Prepare an action analysis report using

activity-based costing data and interpret the report. 6A-3 Appendix 6A: ABC Action Analysis Conventional ABC analysis does not identify potentially relevant costs. An action analysis report helps because it: Shows what costs have been assigned to a cost object. Indicates how difficult it would be to adjust those costs in response to changes in the level of activity.

6A-4 Appendix 6A: ABC Action Analysis Constructing an action analysis report begins with the first-stage allocation process. In addition to computing an overall activity rate for each activity cost pool, an activity rate is computed for each type of overhead cost that is consumed supporting a given activity. Lets revisit the stage-one allocations from the Baxter Battery Company example that we discussed earlier.

6A-5 Appendix 6A: ABC Action Analysis $1,800,000 10,000 orders = $180 per order Other entries in the table are computed similarly. 6A-6 $180 per order 4,000 orders = $720,000 Other entries in the table are computed similarly. 6A-7 $180 per order 6,000 orders = $1,080,000

Other entries in the table are computed similarly. 6A-8 Appendix 6A: ABC Action Analysis Next, label each cost using an ease of adjustment code: Green costs adjust more or less automatically to changes in activity level without any action by managers. Yellow costs can be adjusted to changes in activity level, but it would require management action to realize the change in cost. Red costs can be adjusted to changes in activity level only with a great deal of difficulty and with

management intervention. 6A-9 Appendix 6A: ABC Action Analysis Action Analysis of LongLife Batteries Sales Green costs Direct materials Shipping costs Green margin $ $

18,700,000 $ 7,000,000 11,700,000 $ 11,222,000 478,000 $

1,610,000 (1,132,000) 6,000,000 1,000,000 Yellow costs Direct labor Indirect factory wages Factory utilities Administrative wages and salaries Office equipment depreciation Marketing wages and salaries Selling expenses Yellow margin

5,000,000 3,360,000 850,000 1,280,000 252,000 420,000 60,000 Red costs Factory equipment depreciation Factory building lease Administrative building lease Red margin

1,610,000 - 6A-10 End of Appendix 6A