c h a p t e r 8 management accounting information in the new business environment management...

C H A P T E R 8

Management AccountingInformation In the New Business Environment

Management AccountingInformation In the New Business Environment

Explain the fundamentals of activity-based costing (ABC) and activity-based management (ABM).

Learning Objective 1

Activity-Based Costing (ABC)

A method of attributing costs to products based on:

Costs Activities Products

• assigning costs of resources to activities

• assigning costs of activities to products

Unit-Based Costing (UBC)

The traditional method of allocating costs (manufacturing overhead) to products based on number of units produced. If only three products are produced (one of each), then:

Costs Production Departments

Products

$9,000 Overhead

$3,000

Overhead per product

=

Relationship BetweenUBC and ABC

Unit-Based Costing (UBC)

Model of Costs

Activity-Based Costing (ABC) Hierarchical

Product Cost Model

Costs ofDirect Materials

Costs ofDirect Labor

Variable ManufacturingOverhead Costs

Costs ofUnit-Level Activities

Fixed ManufacturingOverhead Costs

Costs ofBatch-Level Activities

Costs ofProduct Line Activities

Costs of Facility Support Activities

What is the hierarchical product cost model?

ABC—Allocating Resource Costs to Activities

ABC—Allocating Resource Costs to Activities

Facility Support Activities

Product Line Activities

• Unit-Level Activities• Take place each time a unit is produced

• Packing

• Assembly

• Direct Materials, Direct Labor

• Variable Manufacturing Overhead

Batch-Level Activities

Unit-Level Activities

ABC—Allocating Resource Costs to Activities

Facility Support Activities

• Batch-Level Activities

• Number of setups

• Setup hours

• Movements of materials

• Orders for non-stocked items

• Inspections

Product Line Activities

Batch-Level Activities

Unit-Level Activities

ABC—Allocating Resource Costs to Activities

• Product Line Activities• Engineering and design changes

• Warehousing of product line materials

• Production line dedicated supervisors

• Purchasing

• Receiving and shipping

Facility Support Activities

• Facility Support Activities• Property taxes

• Plant security

• Landscaping

• Accounting and legal

• General administrative salaries

Product Line Activities

Batch-Level Activities

Unit-Level Activities

ABC—Allocating Resource Costs to Activities

Does a hammer really cost THAT MUCH?

If a UBC factory produces only three products (a hammer, a clock, and a Ferrari) and a hammer incurs $4 of direct labor and materials, how much will the hammer cost if manufacturing overhead is allocated evenly over finished products?

Cross-Subsidization

$9,000

Overhead

?

Overhead per

product=

Does a hammer really cost THAT MUCH?

Cross-Subsidization

$9,000

Overhead

$3,000

Overhead per

product3 Products

$3,004 !?1 Hammer =

=

Does a hammer really cost THAT MUCH?

Cross-Subsidization

$9,000 Overhead ?

Overhead per product

Under UBC (unit-based costing), some products may be inappropriately assigned costs that actually belong to another product line (in this case, the hammer and clock are obviously cross-subsidizing the Ferrari product line).

=

Product Cost Distortions

What are the Hazards of Allocating Costs?

$8 $20 $100,0002 10 70,000

2 5 25,000

$4 $ 5 $ 5,000

RevenueMaterialsLabor

Profit

Hazards of Allocating Costs

Product profitability before overhead allocation:

Hammer Clock Ferrari

Hazards of Allocating Costs

Product profitability after

overhead allocation:

RevenueMaterialsLaborOverhead

Profit

$ 8 $ 20 $100,0002 10 70,0002 5 20,000

3,000 3,000 3,000

$(2,996) $(2,995) $ 7,000

Hammer Clock Ferrari

In actuality, most of the $9,000 manufacturing overhead is attributable to the Ferrari, revealing it to

be the real money loser.

In actuality, most of the $9,000 manufacturing overhead is attributable to the Ferrari, revealing it to be the real money loser,

BUT because the other products are cross-subsidizing, they appear unprofitable and will be discontinued from production.

$ 8 $ 20 $100,0002 10 70,0002 5 25,000

3,000 3,000 3,000

$(2,996) $(2,995) $ 2,000

RevenueMaterialsLaborOverhead

Profit

Hazards of Allocating Costs

Hammer Clock Ferrari

Hammer Clock Ferrari

$100,000 70,000 25,000 8,990

$ (3,990)

RevenueMaterialsLaborOverhead

Profit

Hazards of Allocating Costs

The result?

Costs Activities Products

Activity-Based Management (ABM)

Managing costs, quality, and timeliness of activities through the identification and use of Cost Drivers and Performance Measures.

Cost Drivers

Performance Measures

Describe total quality management (TQM) and costs of quality (COQ).

Learning Objective 2

What is Total QualityManagement (TQM)?

TQMTQM

The Old Way

The Secret to Success?

Andrew

Carnegie

The New Way

W. Edward Deming

Total QualityManagement (TQM)

“Watch the Qualityand the profits will

take care ofthemselves.”

“Watch the costs and the profits will

take care ofthemselves.”

Define SPC—Statistical Process Control

Total Quality Management (TQM)

$What are the Four

Costs of Quality (COQ)?

Prevention Costs:

Appraisal Costs:

Internal Failure Costs:

External Failure Costs:

Define Each Cost of Quality (COQ)

What is the Effect of Increasing Prevention and Appraisal Costs of

Quality (COQ)?

Learning Objective 3

Compute the opportunity cost of lost sales.

What is robust quality?

Define Taguchi’s loss function and give the formula

Done Chapter 8 Managerial Accounting