Identifying Activities and Their Attributes

Since an activity is action taken or work performed by equipment or people for other people, identifying activities is usually accomplished by interviewing managers or representatives of functional work areas (departments). A set of key questions is

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Cordless Regular Source

Plantwide rate . . . $11.40 $738,000 Exhibit 4-3 Departmental rate . . . 10.73 10.69 Exhibit 4-6 Activity rate . . . 21.60 9.60 Exhibit 4-10

Exhibit 4-11

Comparison of Unit Costs

M a n a g e r s D e c i d e

ABC has been used to ana- lyze the profitability of prod- ucts in the dairy case of food retailers. Milk was found to be the most profitable item, taking up just 23 percent of the space in the dairy case yet providing 25 percent of the revenues and 34 percent of the profits. The activity- based unit cost for dairy

items was calculated using distribution activities, han- dling activities, space, and time on the shelf. The aver- age activity-based cost for a dairy-case item was $0.11, with juice costing $0.23 and milk less than $0.05. ABC also revealed that per-unit cost is affected by the type of handling activities used.

Costs can be lowered by an appropriate choice of a stocking activity. For exam- ple, front-loading and hand- stocking costs 5.5 cents per item whereas using a roll-in cart for stocking costs only 2.7 cents per unit. ■

Source: Jerry Dryer, “ABC’s of Milk Sell- ing,”Dairy Foods (May 1999): p. 31.

ABC and Dairy Products

Objective 4

Explain how an activity-based costing system works for product costing.

asked whose answers provide much of the data needed for an activity-based costing system. This interview-derived data is used to prepare an activity dictionary.Anactiv- ity dictionarylists the activities in an organization along with some critical activity attributes. Activity attributesare financial and nonfinancial information items that

describe individual activities. What attributes are used depends on the purpose. Examples of activity attributes associated with a costing objective include types of resources consumed, amount (percentage) of time spent on an activity by workers, cost objects that consume the activity output (reason for performing the activity), a measure of the activity output (activity driver), and the activity name.

Key Set of Questions

Interview questions can be used to identify activities and activity attributes needed for costing purposes. The information derived from these questions serves as the basis for constructing an activity dictionary as well as providing data helpful for assigning resource costs to individual activities. The list is not exhaustive but serves to illustrate the nature of the information-gathering process.

1. How many employees are in your department?

(Activities consume labor.)

2. What do they do (please describe)? (Activities are people doing things for other people.)

3. Do customers outside your department use any equipment? (Activities also can be equipment doing work for other people.)

4. What resources are used by each activity (equip- ment, materials, energy)? (Activities consume resources in addition to labor.)

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Cost of Resources

Driver Tracing Direct Tracing

Driver Tracing

Activities

Products Assign Costs

Assign Costs

Exhibit 4-12

ABC: Two-Stage Assignment

Interviewers are commonly used to identify activities and their attributes.

©Digital Vision

5. What are the outputs of each activity? (Helps identify activity drivers.)

6. Who or what uses the activity output? (Identifies the cost object: products, other activities, customers, etc.)

7. How much time do workers spend on each activity? By equipment? (Informa- tion needed to assign the cost of labor and equipment to activities.)

Illustrative Example

Suppose, for example, that Jan Booth of Henderson Asso- ciates interviews the manager of SpringBanc’s credit card department, asking the seven questions just listed. Consider the purpose of and response to each question, in the order indicated.

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Question 1 (labor resource):There are six employees, including me.

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Question 2 (activity identification):There are four major activities: supervising employees, processing credit card transactions, issuing customer statements, and answering customer questions.

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Question 3 (activity identification):Yes. Automatic bank tellers service customers who require cash advances.

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Question 4 (resource identification):We each have our own computer, printer, and desk. Paper and other supplies are needed to operate the printers. Of course, we each have a telephone as well.

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Question 5 (potential activity drivers):Well, for supervising, I manage employees’

needs and try to ensure that they carry out their activities efficiently. Processing transactions produces a posting for each transaction in our computer system and serves as a source for preparing the monthly statements. The number of monthly customer statements has to be the product for the issuing activity, and I suppose that customers served is the output for the answering activity. And I guess that the number of cash advances would measure the product of the automatic teller activity, although the teller really generates more transactions for other products such as checking accounts. So, perhaps the number of teller transactions is the real output.

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Question 6 (potential cost objects identified):We have three products: classic, gold, and platinum credit cards. Transactions are processed for these three types of cards, and statements are sent to clients holding these cards. Similarly, answers to questions are all directed to clients who hold these cards. As far as supervising, I spend time ensuring the proper coordination and execution of all activities except for the automatic teller. I really have no role in managing that particular activity.

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Question 7 (identifying resource drivers): I just completed a work survey and have the percentage of time calculated for each worker. All five clerks work on each of the three departmental activities. About 40 percent of their time is spent process- ing transactions, with the rest of their time split evenly between preparing state- ments and answering questions. Phone time is used only for answering client questions, and computer time is 70 percent transaction processing, 20 percent statement preparation, and 10 percent answering questions. Furthermore, my own time and that of my computer are 100 percent administrative.

Activity Dictionary

Based on the answers to the survey, an activity dictionary can now be prepared. Exhibit 4-13 illustrates the dictionary for the credit card department. The activity dictionary names the activity (usually by using an action verb and an object that receives the action), describes the tasks that make up the activity, classifies the activity as primaryorsecondary,lists the users (cost objects), and identifies a measure of activity output (activity driver). A primary activityis an activity that is consumed by a product or customer. A secondary activityis one that is consumed by other primary and secondary activities. Ultimately, secondary activi- ties are consumed by primary activities. For example, the supervising activity is con- sumed by the following primary activities: processing transactions, preparing state- ments, and answering phones. The three products, classic, gold, and platinum credit

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cards, in turn, consume the primary activities. It is not unusual for a typical organi- zation to produce an activity dictionary containing 200 to 300 activities.