Managerial Accounting: Chapter 4.3 ABM

What does ABM use?

ABC for managerial decisions like pricing products, product mix, value engineering

What are the two types of pricing products?

Target price and cost-based price

What is the target price and target cost?

price set by market; max cost to make product

Target cost formula = 

target price - desired profit

What is cost-based pricing?

firm sets the price

selling price =

full cost + desired profit

What is the process for product mix?

Limited machine time to basic or deluxe to each having profit to profit/MH

What is the profit formula?

Sales price - cost

What is the value engineering?

reduce or eliminating NVA activities to lower cost and improve efficiency

What are non value added costs (NVA)?

increase cost to provide p/s, but do not increase their value to customers

Why doesn’t traditional costing at XYZ help with value engineering?

Single MOH cost pool, no data on source or amount of NVA costs

How does ABC fix the invisibility of certain costs?

Breaking into separate activities with their own cost drivers

A firm could use ABC information for which of these decisions?

cutting costs, pricing p/s, and determining the best product mix