Week Three – Cost Behavior, Activity Based Costing/Activity Based Management (ABC/ABM), and Cost-Volume-Profit Analysis

Week Three – Cost Behavior, Activity Based Costing/Activity Based Management (ABC/ABM), and Cost-Volume-Profit Analysis

 

In order to manage the supply chain effectively, it is absolutely critical that one understands cost behavior and how to manage costs.  This section will go through the basics of cost behavior and different costing methods.  We will then cover activity based costing and activity based management.  Lastly, we will put together all of the costing knowledge gained and cover more strategic costing through cost-volume-profit (CVP) analysis.

 

Although the mechanics of the various costing methods differ, all have the same basic objective: to calculate the full manufacturing cost of each unit produced.  The product costing information was used to determine Cost of Goods Sold (COGS on the income statement) and the value of inventory (WIP or work in progress and finished goods inventory) on the balance sheet.

 

Tracing all costs to the product is an example of full absorption costing, which is based on GAAP’s requirement that all manufacturing costs be treat as product costs; that is, all manufacturing costs must be traced back to the product and be included as inventory until the product is sold.

 

Although full absorption costing is required for external reporting, this method is not always useful for internal management decision making.  For internal purposes, managers often need information that is based on cost behavior.  In other words, managers need to know how costs will change as a result of a specific decision.