ABC Action Analysis

Appendix 7A

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Learning Objective 6

(Appendix 7A)
Prepare an action
analysis report using
activity-based costing
data and interpret the
report.
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Appendix 7A: ABC Action Analysis

Conventional ABC analysis does not
identify potentially relevant costs. An
action analysis report helps because it:
• Shows what costs have been
assigned to a cost object.
• Indicates how difficult it would be to
adjust those costs in response to
changes in the level of activity.
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Appendix 7A: ABC Action Analysis

Constructing an action analysis report
begins with the first-stage allocation process.
In addition to computing an overall activity
rate for each activity cost pool, an activity
rate is computed for each type of overhead
cost that is consumed supporting a given
activity.
Let’s revisit the stage-one allocations
from the Baxter Battery Company example
that we discussed earlier.
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Activity Cost Pools
Customer Design Customer
Orders Changes Order Size Relations Other

Appendix 7A: ABC Action Analysis

Total Activity 10,000 4,000 800,000 2,000 N/A
Production Department
Indirect factory wages $ 180 $ 450.00 $ 1.50 $ 300
Factory equipment depreciation 70 87.50 2.62 -
Factory utilities - 62.50 1.88 -
Factory building lease - - - -
General Administrative Department
Administrative wages and salaries 120 100.00 0.50 600
Office equipment depreciation 27 22.50 - 90
Administrative building lease - - - -
Marketing Department
Marketing wages and salaries 45 37.50 - 375
Selling expenses 10 - - 175
Total $ 452 $ 760.00 $ 6.50 $ 1,540

Activity Cost Pools

Customer Design Customer
Orders changes Order Size Relations Other Total
Production Department
Indirect factory wages $ 1,800,000 $ 1,800,000 $ 1,200,000 $ 600,000 $ 600,000 $ 6,000,000
Factory equipment depreciation 700,000 350,000 2,100,000 - 350,000 3,500,000
Factory utilities - 250,000 1,500,000 - 750,000 2,500,000
Factory building lease - - - - 2,000,000 2,000,000
General Administrative Department
Administrative wages and salaries 1,200,000 400,000 400,000 1,200,000 800,000 4,000,000
Office equipment depreciation 270,000 90,000 - 180,000 360,000 900,000
Administrative building lease - - - - 1,100,000 1,100,000
Marketing Department
Marketing wages and salaries 450,000 150,000 - 750,000 150,000 1,500,000
Selling expenses 100,000 - - 350,000 50,000 500,000
Total $ 4,520,000 $ 3,040,000 $ 5,200,000 $ 3,080,000 $ 6,160,000 $ 22,000,000

$1,800,000 ÷ 10,000 orders = $180 per order

Other entries in the table are computed similarly.
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Action Analysis Cost Matrix for SureStart Batteries

Activity Cost Pools
Customer Design Customer
Orders Changes Order Size Relations Total
Total activity for batteries 4,000 - 480,000 N/A
Production Department
Indirect factory wages $ 720,000 $ - $ 720,000 $ 1,440,000
Factory equipment depreciation 280,000 - 1,260,000 1,540,000
Factory utilities - - 900,000 900,000
Factory building lease - - - -
General Administrative Department - -
Administrative wages and salaries 480,000 - 240,000 720,000
Office equipment depreciation 108,000 - - 108,000
Administrative building lease - - - -
Marketing Department - -
Marketing wages and salaries 180,000 - - 180,000
Selling expenses 40,000 - - 40,000
Total $ 1,808,000 $ - $ 3,120,000 $ 4,928,000

$180 per order × 4,000 orders = $720,000

Other entries in the table are computed similarly.
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Action Analysis Cost Matrix for LongLife Batteries

Activity Cost Pools
Customer Design Customer
Orders Changes Order Size Relations Total
Total activity for battery housing 6,000 4,000 320,000 N/A
Production Department
Indirect factory wages $ 1,080,000 $ 1,800,000 $ 480,000 $ 3,360,000
Factory equipment depreciation 420,000 350,000 840,000 1,610,000
Factory utilities - 250,000 600,000 850,000
Factory building lease - - - -
General Administrative Department - -
Administrative wages and salaries 720,000 400,000 160,000 1,280,000
Office equipment depreciation 162,000 90,000 - 252,000
Administrative building lease - - -
Marketing Department - -
Marketing wages and salaries 270,000 150,000 - 420,000
Selling expenses 60,000 - - 60,000
Total $ 2,712,000 $ 3,040,000 $ 2,080,000 $ 7,832,000

$180 per order × 6,000 orders = $1,080,000

Other entries in the table are computed similarly.
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Appendix 7A: ABC Action Analysis

Next, label each cost using an ease of adjustment
code:
• Green costs adjust more or less automatically to
changes in activity level without any action by
managers.
• Yellow costs can be adjusted to changes in activity
level, but it would require management action to
realize the change in cost.
• Red costs can be adjusted to changes in activity
level only with a great deal of difficulty and with
management intervention.
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Appendix 7A: ABC Action Analysis

Action Analysis of LongLife Batteries
Sales $ 18,700,000
Green costs
Direct materials $ 6,000,000
Shipping costs 1,000,000 7,000,000
Green margin $ 11,700,000
Yellow costs
Direct labor 5,000,000
Indirect factory wages 3,360,000
Factory utilities 850,000
Administrative wages and salaries 1,280,000
Office equipment depreciation 252,000
Marketing wages and salaries 420,000
Selling expenses 60,000 11,222,000
Yellow margin $ 478,000
Red costs
Factory equipment depreciation 1,610,000
Factory building lease -
Administrative building lease - 1,610,000
Red margin $ (1,132,000)
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End of Appendix 7A