Of activity-based costing

Customer margin Activity Based costing

Summary by Dorinda Martinez
Master of Accountancy Program
University of South Florida, Summer 2001

This article contains a panel discussion about the relevance of contribution margin analysis. The speakers include Robert Kaplan, John Shank, Charles Horngren and Germain Boer.

Kaplan

Kaplan argured that CM has lost most if not all of its relevance to management accounting; however, he believes that it remains useful for a limited set of purposes. In his view, CM ignores the relevance of “fixed costs”, and has been around for fifty or sixty years.

TOC – The Theory of Constraints advocates a more extreme view of direct costing. This approach recognizes only three critical measurements for organizations:

1. Throughput = sales price – purchases of materials & outside services.

2. Inventory = items that have been purchased that have not yet been consumed.

3. Operating Expenses = Overhead + Direct Labor expense.

This approach to costing is like direct costing in that it is a short-run, powerful optimization procedure. However, the authors of this theory did not attempt to analyze or allocate operating expenses; they are treated as a big blob.

Ignoring “Fixed Costs” – All expenses other than materials expense are assumed fixed in TOC. The problem with this is that fixed costs keep growing. Kaplan asserts that the “fixed costs” are the costs that vary the most. Traditional direct costing can predict short-run results in organizations because it focuses on the fluctuations in products’ volume and mix, keeping some expenses fixed (with respect to the short run). Kaplan believes that the direct costing approach is misleading for most other product related decisions.

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NAB Lifts Cash Profit 7% To $1.6 Billion But Revenue Is Down  — Business Insider Australia
This was partially offset by higher lending balances and a broadly stable customer margin.

Popular Q&A

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How do you calculate contribution margin under activity-based cost

With a ruler, and two drafting pencils.

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