Page 161 - (DK) The Business Book

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MAKING MONEY WORK 15 9
See also: Play by the rules 120–23 ■ Profit versus cash flow 152–53 ■ Good and bad strategy 184–85 ■ The value chain
216–17 ■ Product portfolio 250–55 ■ Benefitting from “big data” 316–17

should about their costs. They that the cost of making a chocolate
may be relatively clear about product, for example, is not “about
direct costs, but vague about 65 cents,” but exactly “59 cents.”
the overhead costs that should This level of accuracy tends
be attributed to specific products. to be especially important when
The commercial consequence of considering nonstandard products, Keeping of costs with
this is that a business may allocate such as the completion of a special a reasonable degree of
marketing spending to a product order of merchandise for the Brazil accuracy can be made a
that is not very profitable. In the Olympics in 2016. Activity-based matter of very great profit
long run, a business that makes costing might show that the costs to the company.
wrong decisions like this will associated with this special order F. W. Taylor
struggle to keep up with its rivals. are higher than they would be for
standard products. This would help
Activity-based accounting the business to set the right prices
Ideally, an accounting system for the Olympic items.
measures every aspect of every To perform effective activity-
transaction and decision related to based costing, a company needs
a particular product or service. The to: first, identify all the direct and calculations, a company can
most effective way of achieving this indirect activities and resources; calculate the total direct and
is through activity-based costing. second, determine the costs per indirect costs for a product or
Whereas traditional accounting indirect activity; and third, identify service. By dividing these costs
systems estimate the overheads the “cost drivers” for each activity. A by the quantity produced, an
(perhaps by assuming that every cost driver is a factor that influences accurate unit cost can be obtained.
unit produced at a factory should or creates costs. For example, a The company can then establish
have the same share of the total bank teller has many activities— reliable break-even points, identify
overhead bill), activity-based costing when measuring the cost driver the products with the profit margins
is much more precise: it breaks of an activity such as handling that make them worth backing (with
down the overhead costs to find out incoming checks, the bank should advertising support, perhaps), and
which activities create which costs. figure out how long the teller spends allow clear comparisons for making
This allows the company to realize on this task alone. From these three sound investment decisions. ■

Frederick Winslow Born in 1856 in Philadelphia, decide what to produce. His
Taylor PA, F. W. Taylor trained as a belief was that if accounting
mechanical engineer. He later information is to be valuable,
became famous for his study it must be useful, timely,
of “Scientific Management,” and formed into comparable
which was based on the idea statements, so that progress
that effective management is (or decline) can be identified
a science with clearly defined quickly. F. W. Taylor died of
laws. Taylor was also known as pneumonia in 1915 at 59.
the “father” of cost accounting.
In the late 19th century, he Key works
established new accounting
systems involving the “monthly 1911 The Principles of Scientific
determination of unit costs.” Management
He highlighted the value of cost 1919 Two Papers on Scientific
data as information that managers Management: A Piece-rate
could use to set prices and System and Notes on Belting