In the Monthly Management Meeting, Each Manager Was Asked to Come

question 38

Essay

In the monthly management meeting, each manager was asked to come up with suggestions for controlling costs.Some managers favoured a simple across-the-board cut in expenditures, with every department accepting the same percentage reduction in their budget.This was supported by several managers as the fairest means to save costs.Your assistant attended the meeting in your absence and suggested that the company consider switching to activity-based costing.Unfortunately, the more he explained, the less support he received, particularly when he mentioned that more information would have to be collected, there would be implementation costs, and that what really mattered were nonfinancial variables, called activities.The meeting ended with everyone wondering how such an idea could lead to cost savings.Required:Explain how an ABC system should be able to save money, even though it focuses on activities, rather than just costs.Compare your assistant's suggestion to an across-the-board cut as a means to save money.

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Definitions:

Machine-to Limit

Adjusting or configuring machinery or components to operate within specific, prescribed limits or tolerances for optimal performance or safety.

Discard Limit

The specified point of wear or damage at which a component or part is no longer considered safe or functional and must be replaced.

Parallelism

The extent to which the friction surface of a brake disc varies in thickness. Slight variations in rotor thickness result in brake pedal pulsation as the pads must move in and out to compensate. Also called taper or thickness variation.

Runout

The degree of wobble or deviation from true circular rotation often related to rotors or wheels.