You are the management accountant for Runmoe Springs Ltd, a company that manufactures suspension components for the automotive industry. Currently, costing in the manufacturing area is based on a standard costing system using overhead applied on direct labour hours. Departmental budget are use to monitor costs in the non-manufacturing areas. The company is contemplating switching to activity, based costing (ABC). The senior managers have just attended a one-day course on ABC, run by a large management consulting firm, but Runmoe’s managing director is feeling frustrated.
It’s always the same. We pay a fortune to attend these courses. The consultants peddle their wares, and no matter what the new gimmick is, they tell us that our business is likely to fail without it. They used to talk about using ABC to improve our product costing. Now they talk about using ABM to improve our control. They see activity-based management as a cure for all ills. I don’t understand why we need a new costing system or how activity-based costing works.
Even the terminology has got me beaten. What’s the difference between activity-based costing and activity-based management? What are these things called activity attributes, root cause cost drivers, non-value-added activities, activity performance measures and processes? How could i use them to improve control at Runmoe?
Write a clear and concise report to Runmoe’s managing director, explaining
1. Potential problems with Runmoe’s existing system for control.
2. Key features of the two-dimensional activity-based costing model
3. Difference between activity-based costing and activity-based management.
4. How ABM could be used to improve Runmoe’s control