Chapter 5 - Activity-based costing and management. After completing this chapter, you should be able to: Compute product costs under a traditional, volume-based product-costing system; explain how an activity-based costing system operates, including the use of a two-stage procedure for cost assignment, the identification of activity cost pools, and the selection of cost drivers; explain the concept of cost levels, including unit-level, batch-level, product-sustaining-level, and facility-level costs;...
Chapter Activity-Based Costing and Management Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Traditional, Volume-Based ProductCosting System Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III The following information is obtained from company records: Production: Units Runs Mode I Mode II Mode III 10,000 run of 10,000 units 20,000 runs of 5,000 units 4,000 10 runs of 400 units 52 Traditional, Volume-Based ProductCosting System Additional information includes: Direct materials Direct labor (hr/board) Setup time (hr/run) Machine time (hr/board) Mode I Mode II Mode III $ 50.00 $ 90.00 $ 20.00 10 10 10 1.25 Manufacturing overhead is determined as follows 53 Traditional, Volume-Based ProductCosting System Budgeted manufacturing overhead $3,894,000 = $33 per hour Budgeted directlabor hours 118,000 54 Traditional, Volume-Based ProductCosting System With these product costs, Aerotech established target selling prices (Cost ×125%) 209.00 x 1.25 55 Activity Based Costing System (ABC) ABC systems follow a twostage procedure to assign twostage overhead costs to products Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products 56 Activity must be done on each unit produced Overhead Costs Total budgeted cost = $3,894,000 Activity Cost Pools Unit Level Batch Level Product Sustaining Level Machinery cost pool $1,212,600 Setup cost pool $3,000 Engineering cost pool $700,000 Activity performed on each batch produced Activities needed to support an entire product line Identification Identification of of Activity Activity Cost Cost Pools Pools Facility Level Facility cost pool $507,400 Activity required in order for the production process to occur 57 Unit Level Batch Level Product Sustaining Level Machinery cost pool $1,212,600 Setup cost pool $3,000 Engineering cost pool $700,000 Facility Level Facility cost pool $507,400 Receiving/Inspection cost pool $200,000 Material-Handling cost pool $600,000 Quality-Assurance cost pool $421,000 Packaging/Shipping cost pool $250,000 58 STAGE ONE Various overhead costs related to machinery Activity cost pool Maintenance Lubrication Depreciation Electricity Computer Support Calibration Machinery Cost Pool Total budgeted cost = $1,212,600 59 STAGE TWO Calculate the pool rate Budgeted Machinery Costs = $1,212,600 Budgeted Machine Hours 43,000 = $28.20/hour Cost Assignment 510 STAGE TWO Calculate the pool rate Budgeted Facilities Cost = $507,400 Budgeted Direct-Labor Hours 118,000 = $4.30/hour Cost Assignment 516 Other Overhead Costs Receiving and Inspection Cost Pool Board Mode I Mode II Mode III Overhead $ 200,000 200,000 200,000 × × × × % 6% 24% 70% ÷ ÷ ÷ ÷ Units 10,000 20,000 4,000 Board Mode I Mode II Mode III Board Mode I Mode II Mode III = = = = MaterialHandling Cost Pool Overhead $ 600,000 600,000 600,000 QualityAssurance Cost Pool Overhead $ 421,000 421,000 421,000 ì ì ì ì % 20% 40% 40% ữ ÷ ÷ ÷ Units 10,000 20,000 4,000 Cost/Unit $ 1.20 2.40 35.00 = = = = × × × × % 7% 30% 63% ÷ ÷ ÷ ÷ Units 10,000 20,000 4,000 = = = = Cost/Unit $ 4.20 9.00 94.50 Cost/Unit $ 8.42 8.42 42.10 Packaging and Shipping Cost Pool Board Mode I Mode II Mode III Overhead $ 250,000 250,000 250,000 × × × × % 4% 30% 66% ÷ ÷ ÷ ÷ Units 10,000 20,000 4,000 = = = = Cost/Unit $ 1.00 3.75 41.25 517 Other Overhead Costs Receiving and Inspection Cost Pool Board Mode I Mode II Mode III Overhead $ 200,000 200,000 200,000 × × × × % 6% 24% 70% ÷ ÷ ÷ ÷ Board Mode I Mode II Mode III $14.82 Board Mode I Mode II Mode III Units 10,000 20,000 4,000 = = = = MaterialHandling Cost Pool Overhead $ 600,000 600,000 600,000 QualityAssurance Cost Pool Overhead $ 421,000 421,000 421,000 × × × × % 20% 40% 40% ÷ ÷ ÷ ÷ Units 10,000 20,000 4,000 Cost/Unit $ 1.20 2.40 35.00 = = = = × × × × % 7% 30% 63% ÷ ÷ ÷ ÷ Units 10,000 20,000 4,000 = = = = Cost/Unit $ 4.20 9.00 94.50 Cost/Unit $ 8.42 8.42 42.10 Packaging and Shipping Cost Pool Board Mode I Mode II Mode III Overhead $ 250,000 250,000 250,000 × × × × % 4% 30% 66% ÷ ÷ ÷ ÷ Units 10,000 20,000 4,000 = = = = Cost/Unit $ 1.00 3.75 41.25 518 Product Cost from ABC These are the new product costs when Aerotech uses ABC 519 Distorted Product Costs Both original and ABC target selling prices are based on (Cost ×125%) The selling price of Mode I and II are decreased, while the selling price for Mode III is increased [$209.00 × 1.25] [$183.44 × 1.25] 520 Distorted Product Costs Can you identify any problems Aerotech is likely to face as a result of this distortion? Traditional costing understates the cost of complex, low volume products 521 Cost Drivers A characteristic of an event or activity that results in the incurrence of costs In selecting a cost driver, we must consider Degree of Correlation Behavioral Effects Cost of Measurement 522 COLLECTING ABC DATA INTERVIEWS AND PAPER TRAILS - The information for ABC systems initially comes from interviews with employees in the support departments and a review of each department’s records STORYBOARDING - A procedure used to develop a detailed process flow chart, which visually represents activities and the relationships among activities MULTIDISCIPLINARY ABC PROJECT TEAMS – To gather information from all facets of an organization’s operations, it is essential to involve personnel from a variety of functional areas A typical ABC project team includes ACCOUNTING, FINANCE, PRODUCTION, OPERATIONS, ENGINEERS, MARKETING, etc 523 Activity-Based Management The use of ABC costing information to help management make decisions 524 Activity-Based Management Activity-based costing establishes relationships between overhead costs and activities so that we can better allocate overhead costs Activity-based management focuses on managing activities to reduce costs 525 Two-Dimensional ABC and ActivityBased Management Cost Assignment View Resource costs Resource costs Process View Activity Analysis Root Root Causes Causes Activity Activity Triggers Triggers Activity Evaluation Activities Performance Performance Measures Measures Cost Objects Cost Objects 526 Elimination of Non-Value-Added Costs Activities Non-valueadded activities Unnecessary Necessary Reduce or Eliminate Continually Evaluate and Improve 527 Using ABM to Eliminate Non-ValueAdded Activities and Costs Identify Activities Identify NonValueAdded Activities Understand Activity Linkages, Root Causes, and Triggers Specify Specify parts parts Select Select vendor vendor Receive Receive parts parts Produce Produce goods goods Inspect Inspect finished finished goods goods Rework Rework defective defective products products Establish Performance Measures Report NonValueAdded Costs 528 Customer Profitability Analysis Customer profitability analysis uses activitybased costing to determine the activities, costs, and profit associated with serving particular customers 529 Customer Profitability Analysis Required special packaging Orders small quantities Demand fast service Often changes orders Orders frequently A costly customer 530 ... overhead costs and activities so that we can better allocate overhead costs Activity-based management focuses on managing activities to reduce costs 5? ? 25 Two-Dimensional ABC and ActivityBased Management... MARKETING, etc 5? ?23 Activity-Based Management The use of ABC costing information to help management make decisions 5? ?24 Activity-Based Management Activity-based costing establishes relationships... Performance Measures Measures Cost Objects Cost Objects 5? ?26 Elimination of Non -Value- Added Costs Activities Non-valueadded activities Unnecessary Necessary Reduce or Eliminate Continually Evaluate and