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INITIATION QUESTION percent.

Furthermore, an accurate assessment


of what your suppliers are costing may produce
Rick Anderson, president and owner of additional profitability increases.”
Roberts Truck Products (RTP, Inc.), was both
pleased and concerned. He was pleased Excerpt 2:
because his company was the market leader in “Since processes are defined by activities,
electronic instrument panels for heavy-duty activity management is needed. Activity based
trucks and had a respectable share of the management identifies activities, their costs,
market for hydraulic cylinders. He was their output, and their value to the organization.
concerned because his company was facing an The outputs of an activity based management
increasingly competitive business environment. system are critical inputs for the performance
It had become more evident that his company management system. Moreover, since activity-
must seek better ways of making strategic based management is all about the economics
business decisions and collecting accurate, of an organization, it facilitates and supports the
reliable information to facilitate this process. objective of waste reduction. It is fundamental to
Moreover, Rick was convinced that greater increasing efficiency and maintaining and
efficiency was needed—that operating improving your competitive position.” Convinced
processes needed to be streamlined, waste that better cost information would help him to
needed to be eliminated, and quality and reduce waste and increase profits, Rick
delivery performance needed to be improved. immediately told Michele-Dawn that he would
Rick expressed these concerns to Michele-Dawn like to implement an ABM system.
Barker, the managing partner of the local office
of a national consulting firm, who suggested that
he consider implementing activity-based Questions to Think About
management (ABM). When Rick mentioned that 1. Why is accurate cost information about
RTP, Inc., was considering the implementation customers and suppliers important?
of an activity-based costing (ABC) system, 2. What is wrong with the claim that all
Michele immediately noted that ABC was a key customers are good customers?
component of an ABM system. Michele- Dawn 3. Will accurate cost information guarantee that
then offered to visit RTP, examine the a firm is competitive?
operations, and prepare a formal proposal for 4. How can managing activities increase
implementing an ABM system. efficiency?
Within two months, Rick received the 5. How can we determine whether activities are
proposal. He was intrigued by the following two of value to a firm?
excerpts from the proposal: 6. What role, if any, do cost reports play in
managing activities?
Excerpt 1:
“Following GAAP, Roberts Truck Products
currently assigns the costs for selling,
merchandising, and distribution to the period
when these costs are incurred. No effort is made
to trace these costs to individual customers or
customer groups. We have done this tracing and
have found that many of your customers are not
profitable. We have found that a small
percentage of your customers and a small
percentage of your products are generating most
of your profits. These results suggest that you
need more accurate costing so that Roberts
Truck Products can better manage products and
customers. I will provide a more detailed report
along with specific recommendations for
changing your product and customer mixes so
that your profits will increase. We are confident
that our recommended changes will allow you to
increase your reported net profit by at least 200

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