CHAPTER Activity-Based Management PowerPoint Presentation by LuAnn Bean Professor of Accounting Florida Institute of Technology © 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Managerial Accounting 11E Maher/Stickney/Weil ☼ CHAPTER GOAL ☼ This chapter shows how ABC and ABM rest on the premise that: Products require activities and activities consume resources For products to be competitive, managers must know Activities for producing goods, services Cost of activities ABC analyses ways to allocate indirect costs while ABM uses analysis to manage costs LO How ABC and ABM work? ABC provides information about profitability in mix of activities, products ABM encourages managers to use information to become low-cost producer or seller LO ABM ACTIVITY ANALYSIS Chart, start to finish, activities used to complete product or service Classify activities as value-added or nonvalue-added Eliminate non-value-added activities Continuously improve, reevaluate efficiency of value-added activities or replace with more efficient activities LO Value Chain Organization Strategy and Administration Production Marketing Distribution Customer Service Customer EXHIBIT 3.1 Research and Design Development LO Value Chain Organization Strategy and Administration Research and Design Development Production Marketing Distribution Customer Service ABM ABManalyses analysesand and evaluates evaluatesevery every step stepof ofthe theValue Value Chain Chain EXHIBIT 3.1 & 3.2 Customer LO NON-VALUE-ADDED NON-VALUE-ADDED COSTS: COSTS: Definition Definition Are costs of activities that the company can eliminate without reducing product quality, performance, or value LO Value Chain Organization Strategy and Administration Research and Design Development Production Marketing Distribution Customer Service ABM ABManalyses analysesand and evaluates evaluatesevery every step stepof ofthe theValue Value Chain Chain Eliminate EXHIBIT 3.1 & 3.2 Customer LO ABC ANALYSIS Potential candidates for elimination because they not add value are Storage Moving: parts, materials, etc around the factory floor Idle time Other production process components LO EXAMPLE You and a friend go to dinner You order tea ($2.50) and a salad ($8.00) Your friend orders appetizer, expensive entree, and dessert The total bill is $60 Traditional cost allocation leads to splitting the bill, $30 apiece What does activity analysis suggest each of you should pay? YOU: $ 10.50 + tax & tip FRIEND: $49.50 + tax & tip 10 LO COST COST DRIVER: DRIVER: Definition Definition Is a factor that causes, “drives,” an activity’s costs 14 LO Which cost drivers listed below would a law firm use? Machine hours Number of surgeries Computer time Purchase orders Labor hours, cost Scrap/rework orders Items produced, sold Quality inspections Pounds of material handled Hours of testing time Clients served # of parts in product Pages typed # of different clients Flight hours Miles driven Machine setups EXHIBIT 3.3 EXAMPLE: Cost Drivers 15 LO Which cost drivers listed below would a law firm use? Machine hours Number of surgeries Computer time Purchase orders Labor hours, cost Scrap/rework orders Items produced, sold Quality inspections Pounds of material handled Hours of testing time Clients served # of parts in product Pages typed # of different clients Flight hours Miles driven Machine setups EXHIBIT 3.3 EXAMPLE: Cost Drivers 16 LO How managers decide which cost driver to use? Typically, managers choose a cost driver that causes the cost 17 LO COST RATE EQUATION Predetermined indirect cost rate = Estimated Indirect Cost ÷ Estimated Volume of Allocation Base 18 LO EXAMPLE: Traditional Costing Ciudad Juarez factory makes products: mountain bikes and racing bikes 1,000 mountain bikes and 200 racing bikes will be produced Direct materials include Frames: $100 per mountain bikes and $200 per racing bike Direct labor: $30 per mountain bike and $60 per racing bike Overhead, allocated at times direct labor What would be the cost of each bike under traditional costing? Continued 19 LO EXAMPLE: Traditional Costing Mountain Bikes Racing Bikes Direct materials Direct Labor Manufacturing overhead1,2 Total cost per bike * DL ($150 * 1,000 + $300 * 200) = $210,000 $100 $200 30 150 60 300 $280 $560 Continued 20 LO EXAMPLE: ABC Costing Ciudad Juarez factory makes products: mountain bikes and racing bikes 1,000 mountain bikes and 200 racing bikes will be produced Direct materials include Frames: $100 per mountain bikes and $200 per racing bike Direct labor: $30 per mountain bike and $60 per racing bike Overhead, allocated by activity costs What would be the cost of each bike under ABC costing? Continued 21 LO EXAMPLE: ABC Costing Activity Rate Mountain Bike Racing Bike Cost driver units Cost driver units Purchasing $20/frame 1,000 frames Setups Cost Allocated Cost Allocated $ 20,000 1,000 frames $ 4,000 13 setups 26,000 13 setups 60,000 Inspections $100/inspect hr 200 hours 20,000 200 hours 20,000 Running machines 45,000 1,500 hrs 15,000 $2,000/setup $30/hour 1,500 hrs Total $111,000 $99,000 Mountain Bike = $111,000 / 1,000 = $111 Racing Bike = $99,000 / 200 = $495 EXHIBIT 3.5 22 LO COST COST HIERARCHY: HIERARCHY: Definition Definition Categorizes costs so changes in one cost can be examined for its effects on other cost categories 23 LO EXAMPLE: Hierarchy of Costs Activity Category Example Capacity Size limitations Aircraft depreciation Customer Needs Special promotions Product Production needs Route schedules Batch Batch Fuel, baggage handling Unit Variable costs Credit card fees 24 LO RESOURCES RESOURCES USED: USED: Definition Definition Are measured by ABC 25 LO UNUSED RESOURCES Knowing Knowing the the difference difference between between resources resources used used and and supplied supplied helps helps managers managers to to identify identify unused unused capacity capacity Finding Finding unused unused capacity capacity helps helps managers managers reduce reduce or or use use it it 26 LO Imprinting Imprintingaa hierarchy hierarchyof ofcosts costs on onABM ABMstatements statements helps helpsmanagers managers understand understandwhat what costs costscan canbe be reduced reducedor orbetter better used used Capacity-sustaining Capacity-sustaining costs costswill willhave have unused unusedresources resources unless unlessoperating operatingatat full fullcapacity capacity EXHIBIT 3.9 27 End of CHAPTER 28 ... Strategy and Administration Production Marketing Distribution Customer Service Customer EXHIBIT 3.1 Research and Design Development LO Value Chain Organization Strategy and Administration Research and. .. You and a friend go to dinner You order tea ($2.50) and a salad ($8.00) Your friend orders appetizer, expensive entree, and dessert The total bill is $60 Traditional cost allocation leads to splitting... Value Chain Organization Strategy and Administration Research and Design Development Production Marketing Distribution Customer Service ABM ABManalyses analysesand and evaluates evaluatesevery every