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1.Activity-Based Costing (ABC)[Original Blog]
Activity-Based Costing (ABC) is a method of allocating costs to products or services based on the activities that they require. It is a more accurate way of determining the true cost of a product or service than traditional costing methods, which often assign costs based on arbitrary measures such as direct labor hours or machine hours. ABC recognizes that different products or services may consume different amounts and types of resources, and therefore have different costs. By identifying the activities that drive the costs and assigning them to the products or services that use them, ABC can help managers make better decisions about pricing, product mix, process improvement, and profitability.
Some of the benefits and challenges of using ABC are:
1. Benefits:
- ABC can provide more accurate and relevant information about the costs and profitability of products or services, especially for complex or diverse product lines.
- ABC can help managers identify and eliminate non-value-added activities, which are activities that do not contribute to customer satisfaction or competitive advantage, and reduce the costs associated with them.
- ABC can help managers improve the efficiency and effectiveness of processes by highlighting the sources of waste, variation, and complexity.
- ABC can help managers align the organization's resources and activities with its strategic goals and customer needs, and support continuous improvement and innovation.
2. Challenges:
- ABC can be costly and time-consuming to implement and maintain, as it requires a detailed analysis of the activities and resources involved in producing or delivering products or services, and frequent updates to reflect changes in the business environment.
- ABC can be difficult to apply to some types of costs, such as overhead costs, which are not directly traceable to specific products or services, or shared costs, which are incurred for the benefit of multiple products or services.
- ABC can be subject to errors and biases, as it relies on the accuracy and validity of the data and assumptions used to identify, measure, and assign costs to activities and products or services.
- ABC can face resistance from some managers and employees, who may perceive it as a threat to their existing practices, incentives, or performance.
An example of how ABC can be used to determine the cost and profitability of two different products is shown below:
| Product | A | B |
| Units produced | 10,000 | 5,000 |
| Direct materials per unit | $10 | $15 |
| Direct labor hours per unit | 0.5 | 1 |
| direct labor rate per hour | $20 | $20 |
| Machine hours per unit | 1 | 2 |
| Machine rate per hour | $50 | $50 |
| Activities | cost driver | Total cost | Cost per unit of driver |
| Set up machines | Number of batches | $100,000 | $1,000 |
| Inspect products | Number of inspections | $50,000 | $500 |
| Pack products | Number of units | $20,000 | $2 |
Using traditional costing methods, the cost per unit of each product would be calculated as follows:
| Product | A | B |
| Direct materials | $10 | $15 |
| Direct labor (0.5 x $20) | $10 | $20 |
| Machine costs (1 x $50) | $50 | $100 |
| Overhead (150% of direct labor) | $15 | $30 |
| total cost per unit | $85 | $165 |
Using ABC, the cost per unit of each product would be calculated as follows:
| Product | A | B |
| Direct materials | $10 | $15 |
| Direct labor (0.5 x $20) | $10 | $20 |
| Machine costs (1 x $50) | $50 | $100 |
| Set up machines (10 batches x $1,000 / 10,000 units) | $1 | $2 |
| Inspect products (100 inspections x $500 / 10,000 units) | $5 | $10 |
| Pack products (10,000 units x $2) | $2 | $2 |
| Total cost per unit | $78 | $149 |
As can be seen, ABC shows that product A has a lower cost per unit than product B, while traditional costing methods show the opposite. This is because ABC assigns more of the set up and inspection costs to product B, which requires more batches and inspections per unit than product A. ABC also shows that product A has a higher gross margin (difference between selling price and cost) than product B, while traditional costing methods show the opposite. This is because ABC reflects the true profitability of each product based on the resources and activities that they consume.
ABC can help managers make better decisions about pricing, product mix, process improvement, and profitability by providing more accurate and relevant information about the costs and profitability of products or services. However, ABC also has some limitations and challenges that need to be considered before implementing it. ABC is not a one-size-fits-all solution, but a tool that needs to be adapted to the specific context and objectives of each organization.
Activity Based Costing \(ABC\) - Cost Determination: Cost Determination Methods and Principles
2.Common Consumer Issues and How to Address Them[Original Blog]
1. Misleading Advertising and Marketing Practices:
- Issue: Consumers often face misleading advertisements that exaggerate product benefits, conceal drawbacks, or make false claims.
- Insight: Businesses use persuasive techniques to attract customers, but when these tactics cross ethical boundaries, consumers suffer.
- Addressing It:
- Research: Before making a purchase, research the product thoroughly. Read reviews, compare features, and verify claims.
- Legal Protections: Consumer protection laws prohibit false advertising. Report violations to relevant authorities.
- Example: Imagine you're considering a new skincare product that promises "instant wrinkle reduction." Look beyond the flashy packaging and check for scientific evidence or customer testimonials.
2. Defective Products and Warranty Issues:
- Issue: Defects in products can lead to safety hazards or financial losses. Warranty disputes also arise.
- Insight: Consumers have the right to expect products to function properly and to receive support when issues arise.
- Addressing It:
- Inspect Products: Examine items upon purchase. If defective, return them promptly.
- Know Your Rights: Understand warranty terms. Some warranties cover repairs, replacements, or refunds.
- Example: Suppose your new smartphone malfunctions within a week. Contact the manufacturer or retailer to claim warranty service.
3. Billing Errors and Unfair Charges:
- Issue: Consumers receive incorrect bills, unauthorized charges, or hidden fees.
- Insight: Transparent billing practices are essential for trust and fairness.
- Addressing It:
- Review Bills: Regularly check bills for accuracy. Question any discrepancies.
- Dispute Charges: Contact the service provider to resolve billing errors.
- Example: You notice an extra charge on your credit card statement. Call the bank to investigate and request a correction.
4. Privacy Violations and Data Breaches:
- Issue: Companies collect personal data without consent, leading to privacy concerns. Data breaches expose sensitive information.
- Insight: Privacy is a fundamental right, and businesses must safeguard our data.
- Addressing It:
- Read Privacy Policies: Understand how companies handle your data.
- Opt-Out Options: Use opt-out features to limit data sharing.
- Example: If a social media platform shares your data without permission, adjust privacy settings or delete your account.
5. poor Customer service and Dispute Resolution:
- Issue: Consumers encounter unresponsive customer service, delays, or unresolved complaints.
- Insight: good customer service builds trust; poor service erodes it.
- Addressing It:
- Document Everything: Keep records of interactions, including dates and names.
- Escalate Politely: If initial attempts fail, escalate the issue to higher authorities.
- Example: You've been waiting weeks for a refund. Call the company, express your frustration, and ask for a resolution timeline.
Remember, as consumers, we have rights. Familiarize yourself with local consumer protection laws and advocate for fair treatment. By staying informed and assertive, we can address common issues effectively and protect our interests.
Common Consumer Issues and How to Address Them - Consumer Rights Understanding Your Consumer Rights: A Comprehensive Guide