based cost management system
TRANSCRIPT
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Activity-Based Cost
Management Systems
18
Chapter Eighteen
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Froilan Calixto
Chris LeeVincent Steve Peralta
May Arboleda-Peralta
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Traditional, Volume-Based Product-
Costing SystemAerotech produces three complex printed circuit boards
referred to as Mode I, Mode II, and Mode III.
The following information is obtained from companyrecords:
Mode I Mode II Mode III
Production:
Un its 10,000 20,000 4,000
Ru n s 1 of 10,000 4 of 5,000 10 of 400
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Traditional, Volume-Based Product-
Costing System Mode I Mode II Mode IIIUn its produ ce d 10,000 20,000 4,000
Dire ct labor (h r/u n it) 3 4 2
Total h ou rs 30,000 80,000 8,000
Total h ou rs re qu ire d 118,000
Budgeted manufacturing overhead $3,894,000
Budgeted direct-labor hours 118,000
= $33 per hour
Mode I Mode II Mode III
Dire ct labor (h r/u n it) 3 4 2
Ove rh e ad rate pe r h ou r 33$ 33$ 33$
Ove rh e ad pe r u n it 99$ 132$ 66$
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Traditional, Volume-Based Product-
Costing SystemWith these product costs, Aerotech established targetselling prices (Cost 125%).
Mode I Mode II Mode III
Dire ct mate rials 50.00$ 90.00$ 20.00$
Dire ct labor 60.00 80.00 40.00Man u factu rin g ove rh ead 99.00 132.00 66.00
Total 209.00$ 302.00$ 126.00$
Mode I Mode II Mode III
Cos t pe r u n it 209.00$ 302.00$ 126.00$
Targe t s e llin g price 261.25 377.50 157.50
209.00 x 1.25
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Traditional, Volume-Based Product-
Costing System
Aerotech wishes to see what target selling priceswould be suggested when using activity-based
costing.
Lets see how ABC works.
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Activity Based Costing System (ABC)
ABC systems follow atwo-stage procedure toassign overhead costs
to products.
Assigningoverhead toproducts is a
difficult process.
I agree!
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Activity Based Costing System (ABC)
ABC systems follow atwo-stage procedure toassign overhead costs
to products.
Lets beginby identifying
our major
activities.
Stage One
Identify significantactivities and assign overhead
costs to each activity inproportion to resources used.
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Activity Based Costing System (ABC)
ABC systems follow atwo-stage procedure toassign overhead costs
to products.
Overhead assigned toactivities are called
activity cost pools.
Stage Two
Identify cost driversappropriate to each activityand allocate overhead to
the products.
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Overhead CostsTotal budgeted cost = $3,894,000
ActivityCostPools
Machinerycost pool
$1,212,600
Setupcost pool$3,000
Engineeringcost pool$700,000
Facilitycost pool$507,400
UnitLevel
BatchLevel
Product-
SustainingLevel
FacilityLevel
Identificationof Activity
Cost Pools
Activitymust be
done oneach unitproduced.
Activityperformedon eachbatch
produced.
Activities needed to supportan entire product line
Activity required in orderfor the productionprocess to occur.
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Overhead CostsTotal budgeted cost = $3,894,000
ActivityCostPools
Machinerycost pool
$1,212,600
Setupcost pool$3,000
Engineeringcost pool$700,000
Facilitycost pool$507,400
MoreCostPools
UnitLevel
BatchLevel
Product-
SustainingLevel
FacilityLevel
Identificationof Activity
Cost Pools
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Receiving/Inspectioncost pool $200,000
Material-Handlingcost pool $600,000
Quality-Assurancecost pool $421,000
Packaging/Shippingcost pool $250,000
Machinery
cost pool$1,212,600
Setup
cost pool$3,000
Engineering
cost pool$700,000
Facility
cost pool$507,400
Unit
Level
Batch
Level
Product-
Sustaining
Level
Facility
Level
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Various overhead
costs relatedto machinery
Maintenance
Depreciation
Computer Support
Lubrication
Electricity
Calibration
Machinery Cost Pool
Total budgeted cost = $1,212,600
Activitycost
pool
STAGE ONE
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Calculate
the poolrate
Budgeted Machinery Costs $1,212,600
Budgeted Machine Hours 43,000$28.20/hour
Cost
Assignment
STAGE TWO
==
Mode I:
$28.20 per hr.
1 hr. per unit
$28.20 per unit
Mode II:
$28.20 per hr.
1.25 hr. per unit
$35.25 per unit
Mode III:
$28.20 per hr.
2 hr. per unit
$56.40 per unit
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Calculate
the poolrate
Budgeted Setup Costs $3,000
Planned Production Runs 15 runs$200 per run
Cost
Assignment
STAGE TWO
==
Mode I: (1 Run)
= $.02 per unit
$200 per run
10,000 units per run
Mode II: (4 Runs)
= $.04 per unit
$200 per run
5,000 units per run
Mode III: (10 Runs)
= $.50 per unit
$200 per run
400 units per run
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Various overhead
costs relatedto engineering
Engineering salaries
Engineering supplies
Engineering software
Depreciation
Engineering Cost Pool
Total budgeted cost = $700,000
Activitycost
pool
STAGE ONE
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Allocate based
on engineeringtransactions
Cost
Assignment
STAGE TWO
Engineering Cost PoolTotal budgeted cost = $700,000
Mode I:
= $17.50 per unit
25% $700,000
10,000 units
Mode II:
= $15.75 per unit
45% $700,000
20,000 units
Mode III:
= $52.50 per unit
30% $700,000
4,000 units
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Various overheadcosts related
to generaloperations
Plant depr.
Plant mgmt.
Plant maint.
Property taxes
Insurance
Security
Facility Cost Pool
Total budgeted cost = $507,400
Activitycost
pool
STAGE ONE
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Calculate
the poolrate
Budgeted Facilities Cost $507,400
Budgeted Direct-Labor Hours 118,000$4.30/hour
Cost
Assignment
STAGE TWO
=
=
Mode I:$4.30 per hr.
3 hr. per unit
$12.90 per unit
Mode II:$4.30 per hr.
4 hr. per unit
$17.20 per unit
Mode III:
$4.30 per hr.
2 hr. per unit
$8.60 per unit
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Product Cost from ABCHere are the new product costs so far . . .Mode I Mode II Mode III
Direct materials 50.00$ 90.00$ 20.00$
Direct labor 60.00 80.00 40.00
Machinery 28.20 35.25 56.40
Setup 0.02 0.04 0.50
Engineering 17.50 15.75 52.50Facilities 12.90 17.20 8.60
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Other Overhead CostsBoard Ove rh e ad % Un its = Cos t/Un it
Mode I 200,000$ 6% 10,000 = 1.20$
Mode II 200,000 24% 20,000 = 2.40
Mode III 200,000 70% 4,000 = 35.00
Receiving and Inspect ion Cost Pool
Board Ove rh e ad % Un its = Cos t/Un it
Mode I 600,000$ 7% 10,000 = 4.20$
Mode II 600,000 30% 20,000 = 9.00
Mode III 600,000 63% 4,000 = 94.50
Material-Handling Cos t P ool
Board Ove rh e ad % Un its = Cos t/Un it
Mode I 421,000$ 20% 10,000 = 8.42$
Mode II 421,000 40% 20,000 = 8.42
Mode III 421,000 40% 4,000 = 42.10
Quality-Assu rance Cost P ool
Board Ove rh e ad % Un its = Cos t/Un it
Mode I 250,000$ 4% 10,000 = 1.00$
Mode II 250,000 30% 20,000 = 3.75
Mode III 250,000 66% 4,000 = 41.25
Packaging and Shipping Cost Pool
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Board Ove rh e ad % Un its = Cos t/Un it
Mode I 250,000$ 4% 10,000 = 1.00$
Mode II 250,000 30% 20,000 = 3.75
Mode III 250,000 66% 4,000 = 41.25
Packaging and Shipping Cost Pool
Board Ove rh e ad % Un its = Cos t/Un it
Mode I 421,000$ 20% 10,000 = 8.42$
Mode II 421,000 40% 20,000 = 8.42
Mode III 421,000 40% 4,000 = 42.10
Quality-Assu rance Cost P ool
Other Overhead CostsBoard Ove rh e ad % Un its = Cos t/Un it
Mode I 200,000$ 6% 10,000 = 1.20$
Mode II 200,000 24% 20,000 = 2.40
Mode III 200,000 70% 4,000 = 35.00
Receiving and Inspect ion Cost Pool
Board Ove rh e ad % Un its = Cos t/Un it
Mode I 600,000$ 7% 10,000 = 4.20$
Mode II 600,000 30% 20,000 = 9.00
Mode III 600,000 63% 4,000 = 94.50
Material-Handling Cos t P ool
$14.82
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Product Cost from ABC
These are the new product costs when Aerotech usesABC.
Mode I Mode II Mode III
Direct materials 50.00$ 90.00$ 20.00$
Direct labor 60.00 80.00 40.00
Machinery 28.20 35.25 56.40
Setup 0.02 0.04 0.50
Engineering 17.50 15.75 52.50Facilities 12.90 17.20 8.60
Other 14.82 23.57 212.85
Total 183.44$ 261.81$ 390.85$
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Product DiversityBoth original and ABC target selling prices are based
on (Cost 125%).
Mode I Mode II Mode III
Tradition al cos tin g 209.00$ 302.00$ 126.00$
ABC cos tin g 183.44 261.81 390.85
Origin al targe t s e llin g price 261.25 377.50 157.50
ABC targe t s e llin g price 229.30 327.26 488.56
[$209.00 1.25] [$183.44 1.25]
The selling price of Mode I and II are reducedand the selling price for Mode III is increased.
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Product DiversityCan you identify any problems Aerotech is likely to
face as a result of this distortion?
Mode I Mode II Mode III
Tradition al cos tin g 209.00$ 302.00$ 126.00$ABC cos tin g 183.44 261.81 390.85
Cos t dis tortion pe r u nit 25.56 40.19 (264.85)
Un its produ ce d 10,000 20,000 4,000
Total cos t dis tortion 255,600 803,800 (1,059,400)
Traditional costing understates the costof complex, low volume products.
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ABC: Some Key Issues
The Past
Small number ofproducts which didnot differ much inrequiredmanufacturingsupport.
Labor was the
dominant element inthe cost structure.
The Present
Numerous productswith more andcomplicatedproductionrequirements.
Labor is becoming anever smaller part
component of totalproduction costs.
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Cost DriversA characteristic of an event or activity that results
in the incurrence of costs. In selecting a costdriver, we must consider . . .
Degree ofCorrelation
Cost ofMeasurement
BehavioralEffects
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Homogeneous Activity Cost PoolsA homogeneous cost pool is a grouping of overhead
costs in which each cost component is consumed inroughly the same proportion by each product line.
A homogeneous cost pool
uses a single cost driver.
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Transaction Costing
Activities Paperwork
Usually
Result In
Transaction
processingprovides a
readilymeasurable
gauge ofdepartmental
activity.
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StoryboardingA procedure used to develop a detailed process flow
chart, which visually represents activities and therelationships among activities.
Step1
Step2
Step3
Step4
These are the steps wefollow to build amemory board.
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Direct versus Indirect CostsVolume-Based Costing
All production costsexcept direct materials
and direct labor arelumped together in oneoverhead cost pool.
Activity-Based Costing
An effort is made toaccount for as many
costs as possible asdirect costs ofproduction.
IndirectCosts
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Indicators of Need for ABC
Line managers do notbelieve the product
costs reports
Marketing does notuse costs reports for
pricing decisions
Product-line profitmargins are hard
to explain
Sales are increasing,but profits are declining.
Some products thathave reported high
profit margins are notsold by competitors
Direct labor is asmall percentage
of total costs
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Optimal Product-Costing System
High
High
Low
Low
Cost
InformationSystemAccuracyOptimal
system
Total Cost
Design, implementationand maintenance costs
Cost of
inferiordecisionsresulting
frominaccurate
information.
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Cost Management Systems
Measure the cost of resources consumed.
Identify and eliminate non-value-added costs.
Determine the efficiency and effectiveness of all
major activities. Identify and evaluate new activities that can
improve future performance.
Objectives
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Non-Value-Added Costs
VA = Valued-added activityNVA = Non-value-added activity
Our goal is to reduce or eliminate the non-value-added activities.
StorageTime
WaitingTime
ProcessTime
MoveTime
InspectionTime
VA NVANVANVANVA
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ABC in the Service Industry
ImplementationProblems
High proportion of
facility-level costs
Activities tend tobe nonrepetitive
human tasks.
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End of Chapter 18This is
real value-addedtime!