Managing Cash Flow

Activity Based Costing Principles 163
Process View
The process view (cost drivers, activities, and performance measures) provides
information about the work accomplished in an activity and its relationship to
other activities. A process can be viewed as a series of activities that work together
to achieve a specific purpose (e.g., various manufacturing functions working
together to produce a finished product). Internal activities can be considered as
links to another activity—all working together to produce a result.
The process view of ABC provides information relative to cost drivers and
performance measures for each activity in the network, which are primarily nonfinancial,
that can be used to analyze and improve the performance of an activity
and the entire process or function. Cost drivers are those events that cause a
change in the total cost of an activity. Cost drivers determine the workload and
effort required to perform an activity. They tell why (e.g., processing a manufacturing
order in response to a prior event such as a customer order), and how much
effort is required (e.g., 24 minutes) to perform the task.
COST DRIVERS—EVENTS THAT CAUSE A CHANGE
IN THE COST OF AN ACTIVITY.
Performance measures are indicators—financial and non-financial—of the work
performed and the results achieved in an activity. They tell how well the activity
was performed and whether it is meeting the needs of its purpose. They can
include measures of the efficiency of the activity, time to perform the activity,
quality of the results, and so on.
ABC Activities
ABC systems focus on the activities to be performed to produce products/services.
Activity costs are assigned to products/services based on each item’s use of
those activities. For instance, in a typical organization, there may be the following
levels of activities:
• Unit level. Performed each time a unit is produced (e.g., manufacturing
operations, quality control)
• Batch level. Performed each time a batch of items is produced (e.g., set-ups,
material handling)
• Product level. Performed to support the providing of each different type of
product/service (e.g., product specifications, order handling)
• Facility level. Performed to support the facility’s general purposes (e.g.,
utilities, security, cleaning, and maintenance). These costs are typically
allocated to products/services based on someone’s judgment.