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20-- Activity-Based Costing Systems, Part 2 - YouTube
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[Music]
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I'm Larry Walter this is principles of
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accounting dot-com chapter 20 and in
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this module we will complete our
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discussion at activity-based costing by
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looking at an implementation example
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follow along with the facts this exam
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example and spreadsheets and so forth
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are repeated in the textbook
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David informed the golf and music
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enthusiast company game and developed
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two specialized product glasses song
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which is a sunglasses with a built-in
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music player and then cap player which
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is a golf cap with a built-in music
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player the company maintains no
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inventory for a recent period cap player
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salt 90,000 units the glasses song sold
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110 thousand units and each product
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sells for $60 per unit so that total
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sales were twelve million dollars during
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the period here's an example of the
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company's calculation material labor and
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applied overhead using a traditional
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costing and we could see cap player has
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a per unit cost with a traditional
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costing model of 64 45 glasses song
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appears to be far more profitable having
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a per unit cost of 47 27 remember that
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we were selling the units at $60 a piece
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so on its face cap player appears to be
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unprofitable here's the income statement
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for the company revenues twelve million
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minus our cap player and glasses song
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cost minus hour period expenses related
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to selling general administrative cost
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giving us our profit for the period of
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four hundred thousand dollars now we
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decided to further evaluate our products
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using activity-based costing we engaged
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a consultant who determined that our
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total product cost for 11 million NRS GA
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was six hundred thousand that was
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evident in the preceding income
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statement we also determined that the
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core components are the same in each
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product that is our electronic chips and
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wiring and so forth was deemed to be the
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same lasses song does require a little
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more material for polarized lenses and
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cap player requires a little extra labor
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for sewing but otherwise their cents for
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the same product both devices are
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produced in batches on an automated
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assembly line at the same pace and
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through similar steps automated machine
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we were renting from rebel robotics and
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we pay a per unit rental charge based on
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the units produced through the
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production
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and we just have the one production line
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and with each batch we have to set up
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the production line we've learned by
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analysis that cap player can be produced
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in batches of 900 so to produce the 90
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thousand caps required 100 setups nine
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hundred caps per setup you know the
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glasses can only be run in batches of
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five fifty and we produced a hundred and
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ten thousand pair of glasses so we had
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to set up the assembly line two hundred
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times to produce the glasses both of the
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products were designed by an internal
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development team we maintain a tech
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support department the caps are sold
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through golf courses and the golf pros
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help customers set up their caps and so
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we really only have to train the golf
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pros one time and as it turns out we
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only had a thousand calls to our tech
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support center to support the caps the
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glasses songs are sold through the
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internet and each customer will call on
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average one time for tech support so we
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have sold one hundred and ten thousand
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glasses and we had one hundred and ten
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thousand tech support calls now let's
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analyze our activities robotics activity
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is deemed to be a unit level activity we
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produce 200,000 units we paid rental per
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unit and so for the most part then we
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had 200,000 units produced and that is
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the metric we're going to use for
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further evaluating our cost other
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activities such as production setup
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occurred at a batch level we had 300
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total setups 100 for one product and 200
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for the other our tech support we had
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the hundred and eleven thousand calls
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one hundred and ten thousand calls were
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related to supporting the glasses and
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one thousand were related to supporting
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the caps and finally we did two
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activities related to product design
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design of each of the two products in
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other words okay now this spreadsheet
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looks rather intimidating but really
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it's not let's divide it into smaller
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sections here's our total cost this is
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the 11 million in 600,000 of total cost
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that we incurred we're breaking it out
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into traditional product cost and sgna
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cost components material labor all of
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our overhead in the product cost section
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above and the SGA cost listed below we
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also look at our activity pools robotics
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production tech support product design
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and then the unallocated amounts amounts
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that we deemed to be cost that aren't
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related to any of those four activities
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and let's take a single row in the
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spreadsheet and see how this works the
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company incurred
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70,000 of insurance cost a study was
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done determined that 30% of that
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insurance was attributable robotics
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activity 60% was attributable to
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production setup and 10% to tech support
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and so as we work across we've allocated
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to the appropriate activities 100% of
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the $70,000 of insurance cost we need to
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do that for each row in this spreadsheet
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whether it's a product cost or an SJ and
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a cost certain costs that are directly
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traced however to cost objects such as
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material and labor it's not allocated in
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this schedule it will be separately
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accounted for here momentarily now the
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robotics department after we've done
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this tabulation is assigned a cost of
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two million two hundred thousand dollars
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we would have similar cost accumulation
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for each activity and this is then what
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we're going to do we're going to
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determine an allocation rate for
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robotics we've got 200,000 units of
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activity Tribute able to two million two
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hundred thousand of cost we get an
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activity cost of $11 per unit for
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robotics if we were to work through this
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whole spreadsheet what we would
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determine using the same process is that
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our production cost $1,700 push that up
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our tech support cost $1 per call and
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our product design cost one hundred
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thousand dollars per product
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this information is then used to
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determine our product profitability
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analysis we have here for example on the
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robotics row $11 per unit remember we
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had 90,000 units for the cap player so
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we had nine hundred ninety thousand
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dollars of robotics cost assigned to the
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cap player and we had a hundred and ten
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thousand glasses and that gives us 1
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million two hundred and ten thousand is
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the cost for the glasses there's the two
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million two hundred thousand cost for
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robotics assigned to the two products we
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do that for each of our cost components
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and look what happens now we've
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concluded that cap player is actually
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more profitable than glasses song with
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activity-based costing very simply once
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we did a very thorough analysis of the
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resources consumed by the activities
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necessary to support each the product we
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got a different view in terms of what
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was happening within our business one
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example of that is the tech support that
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was required to support glasses song was
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much more costly than was capped player
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that was not evident
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and the traditional costing model of
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allocating overhead based on direct
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labor and then leaving all of the sgna
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cost as a period expense and so in some
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settings the activity-based costing
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method can be quite revealing and allow
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someone to fine tune their business to
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better assess what products are
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contributing what amount to
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profitability of the business in
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concluding on activity-based costing it
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is important to fully consider many
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variables some of which are not always
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apparent managerial accounting provides
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many tools to support decision making
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and activity-based costing is one such
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tool ABC is not perfect however ABC is
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no better than the process used to
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identify activities and allocation
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percentages which are ultimately based
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on human judgment remember in our
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example we had to make a number of
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assumptions about what our activities
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were and what the costs were
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attributable as activities that
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spreadsheet itself was full of a number
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of allocations and decisions hopefully
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they were sound and led to the better
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decision making process that we've seen
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