Download - Hbc611 Evatopic3&4 Cvp& ABC Bb
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
1/15
HBC611: Managerial Accounting
Topic 3
Cost Volume Profi t Analysis(Reference: Chapter 3HDFR & I)Topic 4
Cost Allocation &Activity Based Costing
(Reference: Chapter 4&5HDFR & I)
Convenor: Dr. Eva Elijido-Ten
Dr. Eva Elijido-Ten2
Lecture Objectives Topic 3
To appreciate the benefits of a management
information system that classifies costs into fixed andvariable
To understand how the contribution approach may beused for managerial planning and decision making.
To understand the manner in which the relationshipsbetween revenues, costs and profits may be modelledand used as an aid to managerial planning anddecision making in both single and multi productcontexts.
To calculate both operating leverage and margin ofsafety and explain how they are used.
Dr. Eva Elijido-Ten3
Chapter 3:Cost-Volume-Profit Analysis
CVP Analysis looks at thebehaviour of total revenues,
total costs and operatingincome as changes occur inthe level of output, sellingprice, variable costs per unitand fixed costs
CVP Analysis is
useful forplanning, andobserving thesensitivity ofprofit to changesin costs andvolume.
Dr. Eva Elijido-Ten4
CVP Assumptions
1) It is possible to divide costs into F & V elements
2) VC are proportional to Volume
3) FC are constant over the output range
4) Sales Prices remain unchanged
5) Expected levels of efficiency & productivity areunchanged
6) Volume is the only factor affecting costs
7) A Single Product is produced or Constant Sales Mix
8) Production = Sales
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
2/15
Dr. Eva Elijido-Ten5
Three C-V-P Methods1. Graphical Method
2. Contribution Margin Method
3. Equation Method
Breakeven Point occurs where profit = 0
Lecture Illustration 1:
Assume that Teddys Electronics which produces and sellscalculators for $50 per unit has the following cost structure:Total Fixed Costs = $300,000 (Mfg & Selling)
Variable Costs per Unit = $35 (Mfg & Selling).
Calculate the breakeven point .
Dr. Eva Elijido-Ten6
Steps Using the Graphical Method
1. Graph Total Costs (Fixed & Variable) for the levels of sales units
2. Graph Total Revenue for the levels of sales units3. Identify the point of intersection of Total Revenue and Total Cost
lines - the breakeven point (where neither a profit nor a loss ismade).
4. Read from the graph either the Sales Volume in units (x axis)required to breakeven, or the Sales Revenue (y axis) required tobreakeven.The graph can also be used to calculate the amount of profit(loss) that could be earned at a particular level of sales above(below) breakeven sales. (Measure the vertical distance betweencost and revenue lines)
Dr. Eva Elijido-Ten7
Graphical Method
Volume(Sales Units)
$
$300,000
$1m
Sales Revenue Total Costs
Fixed Costs
Variable costs
Breakeven
Point (BEP)
20,000 units
Dr. Eva Elijido-Ten8
Contribution Margin Method
Contribution Margin is simply the difference between salesrevenue minus all variable costs (both manufacturing and selling)
CM = Sales Variable Cost.
This amount contributes first towards covering fixed costsand then towards a profit.
To calculate theUnit Contribution Margin (UCM)UCM = USP - UVC
$50 - $35 = $15
=>This means that $15 from each unit sold will contribute toward covering the
fixed costs of $300,000, and once that is covered, will contribute at a rate of$15 per unit to profit)
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
3/15
Dr. Eva Elijido-Ten9
Break-even Point (BEP)
Calculate the No. of Units required to be sold in order to break-
even (BEP in units)
BEP(units) = Total Fixed Cost = $300000 = 20,000unit sUCM $15
We can also calculateContribution Margin Ratio(CMR) toenable calculation of the Sales Dollars required to breakeven
CMR = USP - UVC = $50 - $35 = $0.30 or30%
USP 50=>This means that 30 cents from every dollar of sales will contributetowards covering fixed costs and then to earning a profit.
Dr. Eva Elijido-Ten10
Targeted Sales & CMR
What Sales Revenue is required to breakeven?
To break even, CMR only need to cover TFC:
BEP ($) = Total Fixed Costs =$300,000= $1mCMR .30
How much Sales$ is required to achieve a target operating income(TOI) of $150,000
Target Sales$ = TOI + TFC = $450,000= $1.5m
CMR .30
The CMR can be calculated from unit or total sales prices and unit or totalvariable costs, respectively.
Know your Variable Cost Ratio (VCR) once CMR is known
=> if CMR is .30, then VCR is .70 (VCR = 1 CMR)
ie., seventy cents in every dollar of sales is used to cover the variablecosts of manufacture and sale
Dr. Eva Elijido-Ten11
Equation Method
The Equation: CM Costing or Variable Costing
Sales - VC - FC = Operating Income
BEP occurs when Revenues cover Expenses orwhen Operating Income = 0
Let Q = the quantity of Sales Units required tobreakeven
Then, 50*Q - 35*Q - 300,000 = 015Q = 300,000
Q = 300,000 / 15Q = 20,000 units
Dr. Eva Elijido-Ten12
Extensions of the Basic Model We can also use the equation method to calculate Targeted
Sales (in units) if we want to earn a Targeted Profit of $150,000(as in previous example)
Question:
How many calculators should Teddys Electronics have toproduce and sell in order to achieve a Target Operating Incomebefore taxof $150,000?50Q - 35Q - 300,000 = $150,000
15Q 300,000 = $150,000
Q = 150,000 + 300,000
15
Target Sales (units)= 30,000 calculators
Target Sales$ = 30,000 * $50 = $1,500,000or
Target Sales$ = (FC + TP) / CMR = $450,000/.3 = $1,500,000
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
4/15
Dr. Eva Elijido-Ten13
Effect of Tax
Sales - Total VC - Total FC = TOI
Where, TOI = Target Operating Income before tax.If NI = Net Income after tax, then the relationship between the two terms is:
OI = N I ( This is often referred to as grossing up)(1 -t)
Assume a tax rate of 30% and an after tax income of $105,000 is required, howmany units need to be sold?(You need to gross up the income to a before taxbasis)
50Q - 35Q - 300000 = 105000/(1 - .3)
15Q 300,000 = 150,000Q = (150,000 + 300,000)/15
= 30,000 units
NI of $105000 = OI
of $150,000 with a
tax rate of 30%
Dr. Eva Elijido-Ten14
CVP Analysis & Risk:Margin of Safety
Difference between the budgeted sales revenue (or units) andthe break-even sales revenue (or units)
Distance between current level of Sales and Break Even point e.g. If Teddys Electronics achieved their targeted operating income of
$150,000, they would have sold 30,000 calculators
BE = 20,000 calculators
margin of safety is 10,000 calculators
OR:
10,000/30,000 = 33 1/3 % margin of safety
$500,000/$1,500,000 = 33 1/3 % margin of safety
Gives a feel for how close projected operations are to thebreak-even point
Dr. Eva Elijido-Ten15
CVP Analysis & Risk:Extent of Operating Leverage Summarises the risk-return trade-off of alternative cost
structures
The extent to which an organisation uses fixed costs in its coststructure.
Leverage provided by increasing fixed costs and loweringvariable costs.
Result = pro fit will increase by a greater amount as thelevel activity changes
The greater the % of FC, the greater the impact on profitfrom a given % change in sales revenue
High fixed costs => high OL Degree of OL = Total Contribution Margin
Operating Income
Dr. Eva Elijido-Ten16
Measuring Operating Leverage
= Contribution Margin
Profit Before Tax
$15 * 30,000
$150,000 = factor of 3
% change in sales x operating leverage factor = %change in net profit
If 20% increase in sales 0.2 x 3
= 60% change in pro fit.
So, $150,000 x .6 = $90,000 increase in profit figure.
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
5/15
Dr. Eva Elijido-Ten17
Labour vs machine intensiveoperations
More highly automated processes:
higher operating leverage
higher break even point
and lower safety margin
Hi-tech designed for greater throughput and potentiallyhigher profits
risk if high demand not realised, of not covering higher fixedcosts
Dr. Eva Elijido-Ten18
Lecture Illustration 2: Al l face 20% increase in sales
Operating leverage% profit
Coy A: 200,000/50,000= 4 => (.2x4) = .8
Coy B: 100,000/50,000= 2 => (.2x2) = .4
Coy C: 450,000/50,000= 9 => (.2x9) = 1.8
Coy. C has the highestincrease in profit due tohighest operating leveragebecause it has the highestfixed costs.
Company A(AccuTime PtyLtd)Amount %
Company B(ManualSystem)Amount %
Company C(Auto. System)Amount %
Sales $500,000 100 $500,000 100 $500,000 100
VariableCosts
$300,000 60 $400,000 80 $50,000 10
Contrib.Margin
$200,000 40 $100,000 20 $450,000 90
FixedExpenses
$150,000 30 $50,000 10 $400,000 80
Net Profit $50,000 10 $50,000 10 $50,000 10
Dr. Eva Elijido-Ten19
CVP analysis with multiple products
Sales mix
reflects the relative proportions of each type of product soldby the organisation
Weighted average unit contribution margin
the average of the products unit contribution margins,weighted by the sales mix
Break - even point =Fixed expenses
Weighted average unit contributi on margin
Dr. Eva Elijido-Ten20
Multi-Product Scenario
CVP Analysis can also be used if a firm produces more than oneproduct HOWEVER, the analysis assumes a constant mix of
products are produced and sold.Lecture Illustration 3:Sweet Smell Companyproduces three types of perfume Adore,Beauty and Cutie. These are sold in the ratio of 1:5:4respectively. These products earn a contribution margin per unitof $60, $40 and $20 per bottle respectively.Fixed Costs for the Company total $5,100,000.Required:
Calculate how many units of each product must be sold tobreakeven?
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
6/15
Dr. Eva Elijido-Ten21
Multi-Product Scenario (Cont) Budgeted sales ratio => 1:5:4
Calculate the weigh ted average CM:Adore 1/10 * $60 = 6
Beauty 5/10 * $40 = 20Cutie 4/10 * $20 = 8Weighted Ave. CM $34
Calculate the BEP in Bot tlesBEP = $5,100,000 = 150,000 bottles
34
Take the number of bottles and multiply by the respective
ratio for each perfumeAdore = 150000 * 1/10 = 15000Beauty = 150000 * 5/10 = 75000Cutie = 150000 * 4/10 = 60000
150,000
150,000
bottles
Topic 4: Cost Allocation& Activity Based Costing
Prepared by: Dr. Eva Elijido-Ten
Reference: Chapter 4&5 (H, D, F, R & I)
Dr. Eva Elijido-Ten23
1. Describe the traditional cost allocation (otherwiseknown as functional-based cos ting) approaches.
2. Explain why functional-based costing approaches mayproduce distorted costs.
3. Identify the three overhead figures and learn how todeal with over/under applied overheads.
4. Understand how an activity-based costing systemworks for product/service costing.
4. Describe how activity-based costing can be used toanalyse customers and suppliers.
Topic 4: Objectives
Dr. Eva Elijido-Ten24
Unit costis the total cost
associated with the units
produced divided by the
number of units produced.
Inventory
valuation
Income
determination
Providing input
to a variety of
decisions such
as
Pricing;
Make or buy;
Accept or
reject special
orders;
Continue or
drop a productline; etc.
Unit cost is used for:
Product costis often defined as
the sum of direct materials, direct
labor, and manufacturing
overhead. This definition is
required for external financial
reporting.
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
7/15
Dr. Eva Elijido-Ten25
Cost Terminology: A Review Cost Object:Any item for which costs are separately
measured & assigned (eg., product, department, project oractivity).
Cost Assignment: Tracing accumulated costs to a costobject, orallocating accumulated costs to a cost object.
Cost Tracing: When costs are directly assigned to a costobject (as in Direct Cost)
Cost Allocation: When costs are shared across a number
of cost objects (as in Indirect Cost)
Cost Driver:The factor which causestotal cost to changeover a range of activity
Dr. Eva Elijido-Ten26
Cost Concept Road Map
Total Costs
Manufacturing
Product Costs/Inventoriable Costs
Non-Manufacturing
Period Costs / Expensed
Materials
Labour
Overhead
Commercial,Distribution
and AdministrationPrime Costs
ConversionCosts
(Direct vs Indirect)(Fixed vs Variable)
(Fixed vs Variable)
Dr. Eva Elijido-Ten27
Costing Approaches
Actual Cost ing - allocates : Indirect costs based on the actual indirect-cost
rates times the actual activity consumption
Normal Costing allocates: Indirect costs based on the budgeted indirect-cost
rates times the actual activity consumptionBoth methods allocate Direct costs to a cost object thesame way: by us ing actual direct-cost rates timesactual consumption
Dr. Eva Elijido-Ten28
Measurement System: Indirect Costs
A predetermined
overhead rate is a rate
based on estimated data.
Budgeted (estimated) cost
Estimated activity usage
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
8/15
Dr. Eva Elijido-Ten29
Examples of Unit-Level Drivers
Units produced
Direct labor hours
Direct labor dollars
Machine-hours
Direct material dollars
What do you not ice are similar among these drivers?
They are all volume-based meaning ___________________
Dr. Eva Elijido-Ten30
TeleFirs t, Inc. produces two telephones: acordless and a regular model. The company hasthe following actual and budgeted data:
Budgeted overhead $360,000
Expected activity (DLH) 100,000
Actual activity (DLH) 100,000Actual overhead $380,000
Example 1: TeleFirst, Inc.
Functional-Based Costing: Plantwide Rate
Dr. Eva Elijido-Ten31
PredeterminedOverhead Rate =
Example 1: TeleFirst, Inc.
Budgeted (estimated) cost
Estimated activity usagePredeterminedOverhead Rate =
$360,000
100,000 DLHPredeterminedOverhead Rate = $3.60 per DLH
Dr. Eva Elijido-Ten32
The total overhead assigned
to actual production is
calledapplied overhead.
Applied
overhead =
Overhead ratex
Actual activity
output
= $3.60 x 100,000 DLH= $360,000
Example 1: TeleFirst, Inc.
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
9/15
Dr. Eva Elijido-Ten33
Cordless Regular
Prime costs $ 78,000 $ 738,000Overhead costs:
$3.60 x 10,000 36,000 ---
$3.60 x 90,000 --- 324,000
Total manufacturing costs $114,000 $1,062,000
Units produced 10,000 100,000
Unit cost $ 11.40 $ 10.62
Per-Unit Cost
Example 1: TeleFirst, Inc.
Dr. Eva Elijido-Ten
Three figures for Overheads
Budgeted overhead => $360,000
Budgeted amount for overhead -use in determination of
predetermined rates
Actual overhead => $380,000
The amount of overhead actually incurred throughout the year
Applied overhead => $360,000
amount of overhead applied to products using predetermined rate($3.60 x 100,000 DLH = $360,000)
NOTE: Lets suppose that actual DLH used is 120,000 =>then applied OH will be: $432,000
$3.60 x 120,000 DLH = $432,000Cont.
34
Dr. Eva Elijido-Ten
Three figures for Overheads (Contd)
Budgeted Actual Applied
$360,000 $380,000 $432,000
35
If overhead is overapplied by $52,000 how would this betreated?
Account Balance % of Total Adjustment
Finished Goods $300,000 20% $10,400
Work in Process $150,000 10% $5,200
COGS $1,050,000 70% $36,400
Total $1,500,000 100% $52,000
This is referred to as pro-rata allocation of over/underapplied overhead.
Dr. Eva Elijido-Ten36
Budgeted overhead $252,000 $108,000
Departmental DataFabrication Assembly
Expected and actual usage (dlh):
Cordless 7,000 3,000
Regular 13,000 77,000
20,000 80,000Expected and actual usage (mh.):
Cordless 4,000 1,000
Regular 36,000 9,000
40,000 10,000Example 1: TeleFirst, Inc.
Functional-Based Costing: Department Rates
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
10/15
Dr. Eva Elijido-Ten37
Applied
overhead =($6.30 x actual mh) + ($1.35 x actual dlh)
= ($6.30 x 40,000) + ($1.35 x 80,000)
= $360,000
= $252,000 + $108,000
Example 1: TeleFirst, Inc.
Dr. Eva Elijido-Ten38
Example 1: TeleFirst, Inc.Per-Unit Cost: Departmental Rates
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
($6.30 x 4,000) + ($1.35 x 3,000) 29,250 ---
($6.30 x 36,000) + (1.35 x 77,000) --- 330,750
Total manufacturing costs $107,250 $1,068,750Units produced 10,000 100,000
Unit cost $ 10.73 $ 10.69
Dr. Eva Elijido-Ten
Significant overhead costs allocated using one or two cost
pools Most or all overhead is considered unit-level
Products that consume different amounts of resources
Products that a firm should successfully make and sellconsistently show small profits
Operations staff disagreeing with accounting over
manufacturing and marketing costs
39
Signals that suggest that ABCimplementation could help a firm:
Dr. Eva Elijido-Ten40
Non-unit activity drivers are
factors that measure the
consumption of non-unit
activities by products and other
cost objects.
Product diversity means that the
products consume overhead activitiesin systematically different proportions.
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
11/15
Dr. Eva Elijido-Ten41
Unit-level activitiesare thosethat are performed each time aunit is produced.
Examples:
Power and machine hours areused each time a unit isproduced. Direct materials anddirect labor activities are also
unit-level activities, even thoughthey are not overhead costs.
Classification of Activities
Batch-level activitiesarethose that are performedeach time a batch ofproducts is produced.
Examples:
Setups, inspections,production scheduling,and material handling.
Dr. Eva Elijido-Ten42
Product-level (sustaining)activitiesare those that areperformed as needed tosupport the various productsproduced by a company.These activities consumeinputs that develop productsor allow products to beproduced and sold.
Examples:Engineering changes, processengineering, and expediting.
Classification of Activities(continued)
Facility-level activitiesare those that sustain afactory's generalmanufacturingprocesses.Examples:
Plant management, landscaping,maintenance, security, property
taxes, and plant depreciation.
Dr. Eva Elijido-Ten
Steps in ABC
1. Define cost object
2. Determine activities
3. Cost those activities
4. Determine the appropriate cost driver
5. Determine the consumption of eachcost driver by the cost objects
6. Allocate the activity costs on that
basis
43 Dr. Eva Elijido-Ten44
Units produced per year 10,000 100,000 110,000
Prime costs $78,000 $738,000 $816,000
Direct labor hours 10,000 90,000 100,000
Machine hours 5,000 45,000 50,000
Production runs 20 10 30
Number of moves 60 30 90
Example 1: TeleFirst, Inc.
Activity UsageMeasures
Product-Costing Data
Cordless Regular Total
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
12/15
Dr. Eva Elijido-Ten45
Activity Activity Cost
Setups $120,000
Material handling 60,000
Machining 100,000
Testing 80,000
Total $360,000
Overhead Activities
Product-Costing Data
Example 1: TeleFirst, Inc.
Dr. Eva Elijido-Ten46
Product Diversity: Consumption Ratios
Setups 0.67 0.33 Production runs
Material
handling 0.67 0.33 Number of moves
Machining 0.10 0.90 Machine hours
Testing 0.10 0.90 Direct labor hours
Overhead Cordless Regular ActivityActivity Phone Phone Driver
a a
b b
c c
d d
20/30 (cordless) and 10/30 (regular)
60/90 (cordless) and 30/90 (regular)
a
Example 1: TeleFirst, Inc.
b
Dr. Eva Elijido-Ten47
Product Diversity: Consumption Ratios
Setups 0.67 0.33 Production runs
Material
handling 0.67 0.33 Number of moves
Machining 0.10 0.90 Machine hours
Testing 0.10 0.90 Direct labor hours
Overhead Cordless Regular Activity
Activity Phone Phone Drivera a
b b
c c
d d
5,000/50,000 (cordless) and 45,000/50,000 (regular)
10,000/100,000 (cordless) and 90,000/100,000 (regular)
c
Example 1: TeleFirst, Inc.
d
Dr. Eva Elijido-Ten48
Setup rate: $120,000/30 =$4,000 per runMaterial-handling
rate: $60,000/90 = $666.67 per move
Machining rate: $100,000/50,000 = $2 per MH
Testing rate: $80,000/100,000 = $0.80 per DLH
Activity Rates
Example 1: TeleFirst, Inc.
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
13/15
Dr. Eva Elijido-Ten49
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs :
Setups ($4,000 * 20; 10) 80,000 40,000
Material handling (666.67 * 60; 30) 40,000 20,000
Machining ($2 * 5,000; 45,000) 10,000 90,000
Testing (0.80 * 10,000; 90,000) 8,000 72,000
Total manufacturing costs $216,000 $ 960,000Units produced 10,000 100,000
Unit cost (total costs/units) $ 21.60 $ 9.60
Activity Rates
Example 1: TeleFirst, Inc.
Dr. Eva Elijido-Ten50
Plantwide rate $11.40 $10.62
Departmental rate 10.73 10.69
Activi ty rate 21.60 9.60
Comparison of Unit CostsCordless Regular
Example 1: TeleFirst, Inc.
Dr. Eva Elijido-Ten
Costs and benefits of alternativeapproaches Plantwide and departmental overhead costing systems
tend to overcost high-volume relatively simple productsand undercost low-volume complex products
ABC systems using multiple cost drivers and overheadrates are more complicated and costly to operate, butproduce more accurate information for decision making
51
Cordless Regular
Plantwide rate $11.40 $10.62
Departmental rate 10.73 10.69Activi ty rate 21.60 9.60
Dr. Eva Elijido-Ten52
ABC In Service And MerchandisingCompanies
The general approach to ABC in the service andmerchandising areas is very similar to the approach in
manufacturing. Costs are divided into homogeneous cost pools and
classified as output unit-level, batch level, product, orservice-sustaining and facility sustaining costs.
The cost pools correspond to key activities.
Costs are allocated to products or customers using activity
drivers or cost-allocation bases that have a cause-and-effect relationship with the cost in the cost pool.
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
14/15
Dr. Eva Elijido-Ten53
Large Customer Ten Smaller Customers
(50% of sales) (50% of sales)Units purchased 500,000 500,000
Orders placed 2 200
Number of sales calls 10 210
Manufacturing cost $3,000,000 $3,000,000
Order-filling costs allocated $202,000 $202,000
Sales-force costs allocated $110,000 $110,000
Example 2: ABC Co.
Customer Costing versus Product Costing
The above allocation of costs may not be reflective of the costs incurred bythe respective customers => better to use ABC
Dr. Eva Elijido-Ten54
Large Customer Ten Smaller Customers
(50% of sales) (50% of sales)Units purchased 500,000 500,000
Orders placed 2 200
Number of sales calls 10 210
Manufacturing cost $3,000,000 $3,000,000
Order-filling costs allocated $4,000 $400,000
Sales-force costs allocated $10,000 $210,000
Example 2: ABC Co.
Customer Costing versus Product Costing
The above allocation of costs is more reflective of the costs incurred by therespective customers => THEREFORE its better to use ABC
Dr. Eva Elijido-Ten5555
Example 3:ABC Co.
Murray Inc. Plata Associates
Part A 1 Part B2 Part A 1 Part B2Unit purchase price $20 $52 $24 $56
Units purchased 80,000 40,000 10,000 10,000
Failed units 1,600 380 10 10
Late shipments 60 40 0 0
Repair rate = $800,000 2,000 = $400 per failed part
Expediting rate = $200,000 100 = $2,000 per latedelivery
60 + 40
(1,600 + 380 + 10 + 10)
The purchasing manager of ABC Co. uses two suppliers,
Murray Inc. and Plata Associates, as the source of two
machine parts: Part A1 and Part B2.
Repairing products $800,000
Expediting products 200,000
Activities Costs
Dr. Eva Elijido-Ten5656
Example 3: ABC Co.(Continued)
Murray Inc. Plata Associates
Part A 1 Part B2 Part A 1 Part B2
Purchase cost $1,600,000 $2,080,000 $240,000 $560,000
Repairing products 640,000 152,000 4,000 4,000
Expediting products 120,000 80,000
Total costs $2,360,000 $2,312,000 $244,000 $564,000
Units 80,000 40,000 10,000 10,000
Total unit cost $ 29.50 $ 57.80 $ 24.40 $ 56.40
-
7/29/2019 Hbc611 Evatopic3&4 Cvp& ABC Bb
15/15
Dr. Eva Elijido-Ten57
Lack of clear business purposeLack of senior management
commitmentDelegating the project to consultants
Poor ABC model design
Individual & organizationalresistance to change
Barriers to Implementing ABC
Dr. Eva Elijido-Ten58
Cost Dimension
Activity-Based Management Model
Resources
(i.e. costs)
Process Dimension
Cost Driver
Analysis
Why?
Performance
Analysis
How well?
Cost Object
(Products &
Customers)
Activities
What?
Objective:Improve Cost
Assignment
Objective:
Cost Reduction
ABM model has twodimensions: a costdimension anda
process dimension.
Dr. Eva Elijido-Ten
Activity-Based Management
A method of management that used ABCas an integral part in critical decision-making situations, including:
Pricing & product-mix decisions
Cost reduction & process improvement decisions
Design decisions
Planning & managing activities
59 Dr. Eva Elijido-Ten 60
THE END