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Introduction to Activity Based Costing

Video Transcript:

Hello, and welcome again to Decision-Making and the Innovation Economy: An Overview of Managerial Accounting. In this module, we will be talking about the fundamentals of activity based costing.

Hello, I'm David Fionda. Currently, I'm a CPA and a member of the accounting faculty at Bentley University in Waltham, Mass. I thought it was important to take a few minutes to provide you with my perspective on decision making and managerial accounting. Before I joined the faculty at Bentley, I spent the majority of my career as an entrepreneur. I started three companies, and had the fortune to sell two of them. I've also had the good fortune to work for companies like Great Plains Software. I watched them grow form a small start-up in Fargo, North Dakota, to being acquired by Microsoft for $1.6 billion. They then became the foundation for the Microsoft Dynamics Accounting Suite. I spent two years working with them, helping them bring their products to the Italian market.

As an entrepreneur, I've always had a great interest in had a great interest in looking at what makes companies successful and what causes companies to fail. Over the past 30 years, I've had the opportunity to observe how our world and business climate have changed -- how we went from sending memos to the typing pool to sending a text message, how even the smallest companies today can now access markets across the entire globe only accessible previously to the largest multinationals, and how the speed of business has accelerated to nearly light-speed.

The common thread to all of this is information and decision making. In today's fast-paced innovation economy, getting the right information and the right decision is more than just an accounting exercise. It's critical to the survival of any business. I've seen our economy transform into an innovation economy. Thanks to the power of the web, consumers today are keenly aware of every product choice that may be available from multiple channels and providers. Gone are the days where you go to the TV store and purchase a television, or you get your housewares at Walmart. Many years ago, managerial accounting was simply about going through a series of calculations performed by a select group of individuals. The environment and markets were tightly controlled and you could wait days or weeks for your answer.

Today, every person in every organization is making those key decisions. The pace of today's competitive markets can't wait for an answer. The largest companies, like Apple Computer, to the smallest web start-ups have to understand how the different components of the cost of their product work so they can accurately and quickly predict cost across a whole spectrum of sales and production -- which products to introduce, which products to emphasize at what price, how to evaluate their performance and take corrective action, which costs are relevant to any decision, how to manage overhead to drive profitability, and how decisions on accepting special orders, eliminating a product line, a location, or a division, or whether to outsource, and most importantly, when and how to replace or acquire new equipment.

Successfully companies are always innovating by constantly introducing new products and services. Timely, relevant information is critical to supporting these decisions. The competition is so fierce today, there's no margin for error. Companies that understand this concept, like Apple, can price their products to succeed and ensure they are profitable. Companies that don't understand their product and service costs often making bad pricing and business decisions that can doom them to failure.

The focus of management accounting is decision making. To make the best decision, you need accurate information quickly. Only the companies with the best information can make decisions at the speed that today's innovation economy requires.

I really hope that you enjoyed this module. I encourage you to reach out to me and ask any questions, or let me know if I could be of further assistance to your organization. Thank you.

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Instructor for this course
Course Syllabus
Fundamentals of ABC
  The 3 Steps of ABC23:55
  Example of Activity Based Costing14:02
  Hierarchy of Activity Based Costs 6:30
Continuous Play
  Fundamentals of Activity Based Costing 47:59
  Slides: Activity Based CostingPDF
  Activity Based Costing Glossary IndexPDF