chapter 8perspective 3/e by langfield-smith, thorne & hilton slides prepared by kim langfield-smith...
TRANSCRIPT
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Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian
Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Chapter 8
Activity-based costing
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2Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Problems with conventional
product costing systems
� General features of conventional systems
�Direct material and direct labour costs are traced to products
�Manufacturing overhead costs are allocated to products using a predetermined overhead rate
�Manufacturing overhead rate is calculated using some measure of production volume
�Non-manufacturing costs are not assigned to products
continued
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3Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
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4Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Problems with conventional
product costing systems
� Failure to adapt to the changing business environment
�Increasing levels of non-volume-driven manufacturing overhead costs
�Increasing proportion of non-manufacturing costs
�Causes of changes in costs
�Changing product structures
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5Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Indicators of problems with a
product costing system
� Product costing systems are likely to result in inaccurate product cost when…
�Proportion of direct labour costs decrease
�Proportion of manufacturing overhead costs increase
�Proportion of manufacturing overhead costs, not related directly to production volume, increases
�Non-manufacturing costs which are product-related become substantial; and
�Product diversity increases
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6Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
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7Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Problems with costing in service
businesses
� Service firms tend to use firm-wide volume-based overhead rates
�Overhead costs are increasing in importance and are increasingly non-volume driven
� Customers are demanding more diverse and higher quality services
�Increases in product diversity and in overhead costs
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8Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Activity-based costing
� A methodology that can be used to measure both the cost of cost objects and the performance of activities
� Can help solve problems such as
�Distorted product costs
�Poor cost control
� The ABC method adopted, depends on the problems that need to be addressed
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9Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
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10Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
An activity-based costing model
� The costing view
1. Measures the cost of activities
2. Assign activity costs or products
� Activity management view
� The nature of cost drivers
� Resource drivers
� Activity drivers
� Root cause cost drivers
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11Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
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12Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
The costing view of ABC
� Measuring the cost of activities
�Assign costs to activity centres
�Identify and cost the activities performed in each activity centre
� Assigning activity costs to products
�Calculate the activity cost per unit of activity driver
�Prepare a bill of activities for each product
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13Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
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14Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Activity-based costing
terminology
� Activity: a unit of work performed with the organisation
� Cost driver: a factor or activity that causes cost to be incurred
� Resource driver: cost driver used to estimate the cost of resources consumed by an activity
� Activity driver: a cost driver used to estimate the cost of an activity consumed by the cost object
continued
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15Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Activity-based costing
terminology
� Root-cause cost driver: the underlying factors that cause activities to be performed and their costs to be incurred
� Bill of activities: identifies the activities, the activity cost per unit of activity driver, the quantity of activity drivers consumed, and, therefore, the cost of the activities consumed by the product
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16Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Different forms of ABC
� Simple approach: allocates manufacturing overhead to products
� ABC system for indirect costs: allocates manufacturing overhead and non-manufacturing costs to products
� Comprehensive system: all product-related costs, except direct material, are included in the ABC system
continued
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17Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Different forms of ABC
� Which costs should be included in an ABC system?
�The decision to include activity based management an in ABC systems will influence the range of costs included in the system as well as the type or cost drivers
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18Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
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19Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Activity-based hierarchy of
costs and activities
� Unit level activities�Performed for each batch of product
� Batch level activities �Performed for each batch of products
� Product level (or product-sustaining) activities�Performed for specific products or product families
� Facility level (or facility-sustaining) activities�Not usually included in product costs
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20Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Activity-based vs. conventional
product costs
� Conventional costing assumes product costs are driven by volume-based cost drivers
� Conventional costing ignores batch size. Units produced in large batches consume a relatively low consumption per unit of batch costs
� ABC may include non-manufacturing costs
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21Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
The benefits of ABC are greatest
when*
� Overhead costs are a significant proportion of total cost, and a large part of overhead is not directly related to production volume
� The business has a diverse product range, and individual product’s use of support resources differs from their use of volume-based cost drivers
continued
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22Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
The benefits of ABC are greatest
when...
� Production activity involves diverse batch sizes and product complexity
� Proportion of product-related costs incurred outside manufacturing is increasing relative to manufacturing costs
continued
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23Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
The benefits of ABC are greatest
when*
� There are likely to be high costs associated with making inappropriate decisions, based on inaccurate product costs
� The cost of designing, implementing and maintaining the ABC system is relatively low due to sophisticated IT support
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24Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Impediments to introducing
ABC
� Lack of awareness of ABC
� Uncertainty about the potential benefits from ABC
� Firms understand the need for change but are concerned about the extensive resource requirements to implement ABC
� Resistance to change among managers and employees
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25Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Other activity-based costing
issues
� Variations in types of ABC include whether
�Actual (past) or budgeted costs are analysed
�Implementation is a one-off project or an on-going system
�Cost objects, other than products, are included
� Budgeted costs may be used in an ABC system
� ABC may be implemented as a one-off project or a system
continued
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26Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Other activity-based costing
issues
� Implications of excess capacity
�ABC estimates the cost of resources used to perform activities to produce and sell products, which may not always equal the cost of resources supplied
�Need to account for the costs of unused capacity when budgeted costs have been used to generate activity-based product costs
continued
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27Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Other activity-based costing
issues
� Behavioural issues
�Change can be perceived as threatening
�ABC may require changes in data collected and collection and analysis procedures
�Bottom-up change management may give some degree of ownership of any changes caused by ABC
�Management must be seen as committed to the change process
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28Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Limitations of activity-based
costing
� Facility level costs
�If a high level of facility-level costs are allocated to products, an arbitrary element enters into the product cost
� Use of average costs
�Unitised batch, product and facility-level costs can lead to product costs that are of limited use for decision making
continued
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29Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Limitations of activity-based
costing
� Complexity
�The cost of updating an ABC system can be very high, but is needed to avoid producing outdated, irrelevant information
�The level of complexity increases when the systems is used for activity management
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30Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Activity-based costing in service
organisations
� ABC can be difficult to implement in service firms, because
�High levels of facility costs so fewer cost can be included
�Individual activities are difficult to identify because they are non-repetitive
�A non-repetitive production environment makes it difficult to identify service outputs