Download - Jordan Managment Accounting 42
-
8/8/2019 Jordan Managment Accounting 42
1/33
Learning Objective 4
Assign costs to a cost Assign costs to a costobject using a secondobject using a second- -
stage allocation.stage allocation.
-
8/8/2019 Jordan Managment Accounting 42
2/33
Classic Brass Information Standard Stanchions
1 .1 . Requires no new design resources.Requires no new design resources.
2.2. 30,000 units ordered with 600 separate orders.30,000 units ordered with 600 separate orders.3.3. Each stanchion requires 35 minutes of machineEach stanchion requires 35 minutes of machine
time for a total of 17 ,500 machinetime for a total of 17 ,500 machine- -hours.hours.
Custom Compass Housing1 . Requires new design resources.2. 400 separate orders.3. 400 custom designs prepared.4. 1 ,250 compass housings produced, requiring 2
machine-hours each for a total of 2,500 machine-hours.
Assigning Overhead to
Products
-
8/8/2019 Jordan Managment Accounting 42
3/33
Assigning Overhead to
Products
-
8/8/2019 Jordan Managment Accounting 42
4/33
Le ts tak e a look at how Classic Brass syst emworks for just on e of th e 250 custom e rs
Windward Yachts who plac ed a total of thr ee ord e rs.
Ord e rs1 .1 . Two orders for 1 50 standard stanchions per order.Two orders for 1 50 standard stanchions per order.2.2. One order for a custom compass housing.One order for a custom compass housing.
Machin e- hours1 .1 . The 300 standard stanchions required 17 5 machineThe 300 standard stanchions required 17 5 machine- -hours.hours.2.2. The custom compass housing required 2 machine hours.The custom compass housing required 2 machine hours.
Assigning Overhead to
Customers
-
8/8/2019 Jordan Managment Accounting 42
5/33
Assigning Overhead to
Customers
-
8/8/2019 Jordan Managment Accounting 42
6/33
-
8/8/2019 Jordan Managment Accounting 42
7/33
Prepare Management Reports
CustomStandard Compass
Stanchions Housings TotalSales 2,660,000$ 540,000$ 3,200,000$Direct costs
Direct material 905,500 69,500 975,000 Direct labor 263,750 87,500 351,250 Shipping 60,000 5,000 65,000
Product Margin CalculationsThe first step in computing product margins is togather each products sales and direct cost data.
-
8/8/2019 Jordan Managment Accounting 42
8/33
-
8/8/2019 Jordan Managment Accounting 42
9/33
Prepare Management ReportsP roduct Margin Calculations
The third step in computing productmarginsis to deduct each productsdirect and indirect costs from sales.
al sCosts
ir ct at rial
ir ct la or i ing
Custo r ord rsP roduct d sign
rd r siotal cost
P roduct argin ( )
Custotandard tanc ions Co ass ousings
-
8/8/2019 Jordan Managment Accounting 42
10/33
CustomStandard CompassStanch ions Hous ings Tota l
Sa l s 2,660,000$ 0,000$ ,200,000$ Tota l costs 1,753,750 589,500 2,343,250 P roduct marg ins 906,250$ 49,500)$ 856,750$
L ss costs not ass igned to products:Customer re lat ions 367,500
ther 490,500 Tota l 858,000
Ne t operat ing loss (1,250)$
Product Marg in Ca lcu lat ionsThe product margins can be reconciled with
the companys net operating income as follows:
Prepare Management Reports
-
8/8/2019 Jordan Managment Accounting 42
11/33
Prepare Management ReportsCustom e r P rofita ility nalysis
The first step in computing Windward Yachts customer margin is to gather its sales and direct cost data.
in ar a h ts
al e sir ec t costs
ir ec t mat e rialir ec t la or h ipp in
-
8/8/2019 Jordan Managment Accounting 42
12/33
Prepare Management ReportsCustom e r P rofita ility nalysis
The second step is to incorporate Windward Yachtspreviously computed activity-based cost assignments.
in ar a ts
al e sir e t osts
ir e t ma t e rialir e t la or
i inC ost assi nm e ntsCustom e r or e rsP ro u t e si n
r e r si e 3,363 Custom e r r e lations ,470
-
8/8/2019 Jordan Managment Accounting 42
13/33
Prepare Management ReportsCustom e r P rofita ility nalysis
The third step is to compute Windward Yachts customer margin($699) by deducting all its direct and indirect costs from its sales.
al e sir e t osts
ir e t mat e rialir e t la or
i inCustom e r or e rsP ro u t e si nOr e r si e Custom e r r e lations
Custom e r mar in
Win ar a ts
-
8/8/2019 Jordan Managment Accounting 42
14/33
-
8/8/2019 Jordan Managment Accounting 42
15/33
Product Margins Computed Using
the Traditional Cost System
Plantwid e manufacturingov e rh e ad rat e
$1 ,000 ,00020 ,000 MH = $50 p e r machin e- hour =
The second step in computing product marginsis to compute the plantwide overhead rate.
P roduction e partm e nt
ndir e ct factor wag e s 500 ,000$ Factor eq uipm e nt d e pr e ciation 300,000 Factor utiliti e s 120,000 Factor uilding l e a se 80,000
otal manufacturing ov e rh e ad 1,000 ,000$
Manufacturing v e rh e ad o sts at la ss ic ra ss
Machin e - hour standard tanchion s 1 ,500 u s tom compa ss Hou s ing s 2 ,500 otal ma chin e - hour s 20 ,000
-
8/8/2019 Jordan Managment Accounting 42
16/33
Product Margins Computed Using
the Traditional Cost SystemThe third step in computing product margins isallocate manufacturing overhead to each product.M ac i e Ove ea Ove ea
s Ra e All ca ea a a c i s 17 500 50.00$ 875 000$s ass si s 2 500 50.00 125 000 al ve ea all ca e c s 1 000 000$
17 ,500 hours $50 per hour = $8 7 5,000
-
8/8/2019 Jordan Managment Accounting 42
17/33
-
8/8/2019 Jordan Managment Accounting 42
18/33
-
8/8/2019 Jordan Managment Accounting 42
19/33
-
8/8/2019 Jordan Managment Accounting 42
20/33
Differences Between ABC andTraditional Product Costs
Traditional costing allocates all manufacturingoverhead costs using a volume-related allocationbase. ABC costing also uses non-volume related
allocation bases.
There are three reasons why thereported product margins for the two
costing systems differ from one another.
-
8/8/2019 Jordan Managment Accounting 42
21/33
-
8/8/2019 Jordan Managment Accounting 42
22/33
Targeting Process Improvement Activity-based management is
used in conjunction with ABC toidentify areas that would benefit
from process improvements.
While the theory of constraintsapproach discussed in Chapter 1
is a powerful tool for targetingimprovement efforts, activity rates
can also provide valuable clues onwhere to focus improvement efforts.
BenchmarkingBenchmarking can be used to compare activity costcan be used to compare activity costinformation with worldinformation with world--class standards of performanceclass standards of performance
achieved by other organizations.achieved by other organizations.
-
8/8/2019 Jordan Managment Accounting 42
23/33
Activity-Based Costing and ExternalReporting
Most companies do not use ABCfor external reporting because . . .
1 . External reports are less detailed than internalreports.
2. It may be difficult to make changes to the companysaccounting system.
3. ABC does not conform to GAAP.
4. Auditors may be suspect of the subjective allocationprocess based on interviews with employees.
-
8/8/2019 Jordan Managment Accounting 42
24/33
ABC Limitations
Substantial resourcesrequired to implement
and maintain.
Resistance tounfamiliar numbers
and reports.
Desire to fullyallocate all costs
to products.
Potentialmisinterpretation of unfamiliar numbers.
Does not conform toGAAP. Two costing
systems may be needed.
-
8/8/2019 Jordan Managment Accounting 42
25/33
ABC Action Analysis
-
8/8/2019 Jordan Managment Accounting 42
26/33
Learning Objective 6
Prepare an action analysisPrepare an action analysisreport using activityreport using activity- -basedbasedcosting data and interpretcosting data and interpret
the report.the report.
-
8/8/2019 Jordan Managment Accounting 42
27/33
ABC Action Analysis
Conventional ABC analysis does notidentify potentially relevant costs. An
action analysis report helps because it:Shows what costs have been
assigned to a cost object.
Indicates how difficult it would be toadjust those costs in response tochanges in the level of activity.
-
8/8/2019 Jordan Managment Accounting 42
28/33
Constructing an action analysis reportbegins with the first-stage allocationprocess. In addition to computing an
overall activity rate for each activity costpool, an activity rate is computed for each
type of overhead cost that is consumedsupporting a given activity.
Lets revisit the stage-one allocationsfrom the Classic Brass example that we
discussed earlier.
Appendix : ABC Action Analysis
-
8/8/2019 Jordan Managment Accounting 42
29/33
Appendix : ABC Action Analysis
$1 25,000 1 ,000 orders = $ 1 25 per order
Other entries in the table are computed similarly.
-
8/8/2019 Jordan Managment Accounting 42
30/33
$1 25 per order 600 orders = $ 7 5,000
Other entries in the table are computed similarly.
Appendix: ABC Action Analysis
-
8/8/2019 Jordan Managment Accounting 42
31/33
$1 25 per order 400 orders = $50,000
Other entries in the table are computed similarly.
Appendix: ABC Action Analysis
-
8/8/2019 Jordan Managment Accounting 42
32/33
N ext, label each cost using an ease of adjustmentcode:
Green costs adjust more or less automatically to
changes in activity level without any action bymanagers.Yellow costs can be adjusted to changes in activity
level, but it would require management action to
realize the change in cost.Red costs can be adjusted to changes in activity
level only with a great deal difficulty and withmanagement intervention.
Appendix: ABC Action Analysis
-
8/8/2019 Jordan Managment Accounting 42
33/33