Topics
2. ABC: - Differences in calculating the fin. variances versus the old systems
In many cases you aren't able to catch on in numerical terms the differences in assessing the responsibility center performances between an ABC system and the volume-based systems.
I will compare, with regard to just one kind of overheads, Actual, Traditional Flexible Budget and ABC Flexible Budget.
I remind that, by Flex. Budget, I mean the report got by applying to the actual output of a period the efficiency standards, the cost ones, set as a basis in the budget.
For further advice I am available.
INPUT
Overheads: - SETUP.
Tradit. Budget hypothesis: Fixed costs.
ABC hypothesis: Variable cost regard to setup numbers; € 30,000 per setup.
Actual: € 55,000 of setup costs.
PERFORMANCE REPORT
ACT. TRFB. ABCFB
SETUP 55,000 80,000 60,000
As you can see, if we look at the variances, they add up to 25,000 unfavourable versus Traditional FB and to just to 5,000 unfavourable versus ABC FB.
The latter uses the activity driver "setup number" to gauge the real resource consumption.
All I have written is a very simple example of how, although its implementation is time-consuming, the ABC is more adherent to the operational management.
If even we take into account the pricing as a markup to the cost, the long-run profitability analysis, we see how the diverse measurements of the ABC have strategic effects.
1. The cost of the complexity
Nowadays the complexity of the manufacturing processes and products costs more than it is really measured.
Before to take any decision for redesigning the processes following the engineering instructions it'd be better gauge its weight in the best way possible.
Here is a good and immediate way of my conception to make it.
It goes without saying that you should consider similar products/services/projects that serve the same market segment.
Cost of Complexity = (Unit Direct Costs of the most complex product/service/project less the Unit Direct Costs of the least complex one) times the output units of the most complex one plus the Revenues from the Differential Equivalent Units of the least complex one (difference of cycle time between the two p/s/p times the output units of the most complex one to cycle time of the least complex one).
Where:
The most complex product/service/project = product A
The least complex product/service/project = product Z
Cost of complexity = (UDC of product A - UDC of product Z) x Output Units of A + RDEU of Z
In this formula you consider both out-of-pocket costs and the opportunity costs.