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DESCRIPTION
ABCTRANSCRIPT
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5-*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 company records:
Sheet1
Mode IMode IIMode III
Production:
Units10,00020,0004,000
Runs1 run of 10,000 units4 runs of 5,000 units10 runs of 400 units
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5-*Traditional, Volume-Based Product-Costing SystemAdditional information includes:Manufacturing overhead is determined as follows
Sheet1
Mode IMode IIMode III
Direct materials$50.00$90.00$20.00
Direct labor (hr/board)342
Setup time (hr/run)101010
Machine time (hr/board)11.252
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Mode IMode IIMode III
Direct materials$50.00$90.00$20.00
Direct labor60.0080.0040.00
Manufacturing overhead99.00132.0066.00
Total$209.00$302.00$126.00
Sheet2
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Sheet6
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5-*Traditional, Volume-Based Product-Costing System
Sheet1
Mode IMode IIMode III
Units produced10,00020,0004,000
Direct labor (hr/unit)342
Total hours30,00080,0008,000
Total hours required118,000
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Mode IMode IIMode III
Direct labor (hr/unit)342
Overhead rate per hour$33$33$33
Overhead per unit$99$132$66
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
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5-*Traditional, Volume-Based Product-Costing SystemWith these product costs, Aerotech established target selling prices (Cost 125%).209.00 x 1.25
Sheet1
Mode IMode IIMode III
Direct materials$50.00$90.00$20.00
Direct labor60.0080.0040.00
Manufacturing overhead99.00132.0066.00
Total$209.00$302.00$126.00
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Mode IMode IIMode III
Cost per unit$209.00$302.00$126.00
Target selling price261.25377.50157.50
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Sheet6
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5-*Activity Based Costing System (ABC)ABC systems follow a two-stage procedure to assign overhead costs to products.Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used.Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products.
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5-*Overhead CostsTotal budgeted cost = $3,894,000
ActivityCostPoolsMachinerycost pool$1,212,600Setupcost pool$3,000Engineeringcost pool$700,000Facilitycost pool$507,400UnitLevelBatchLevelProduct-SustainingLevelFacilityLevelIdentificationof ActivityCost Pools
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5-*Receiving/Inspectioncost pool $200,000Material-Handlingcost pool $600,000Quality-Assurancecost pool $421,000Packaging/Shippingcost pool $250,000Machinerycost pool$1,212,600Setupcost pool$3,000Engineeringcost pool$700,000Facilitycost pool$507,400UnitLevelBatchLevelProduct-SustainingLevelFacilityLevel
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5-*Machinery Cost PoolTotal budgeted cost = $1,212,600ActivitycostpoolSTAGE ONEVarious overheadcosts relatedto machinery
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5-*Calculatethe poolrateBudgeted Machinery Costs $1,212,600 Budgeted Machine Hours 43,000 $28.20/hourCostAssignmentSTAGE TWO==
Sheet1
Mode I:
$28.20per hr.
1hr. per unit
$28.20per unit
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Sheet1
Mode II:
$28.20per hr.
1.25hr. per unit
$35.25per unit
Sheet2
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Sheet6
Sheet1
Mode III:
$28.20per hr.
2hr. per unit
$56.40per unit
Sheet2
Sheet3
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Sheet6
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5-*Calculation oftotal setup costSetup Cost PoolTotal budgeted cost = $3,000ActivitycostpoolSTAGE ONE
Sheet1
Total budgeted setup cost
$20per hour
10hr. per setup
$200cost per setup
15production runs
$3,000Total
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5-*Calculatethe poolrate Budgeted Setup Costs $3,000Planned Production Runs 15 runs $200 per runCostAssignmentSTAGE TWO==
Sheet1
Mode I: (1 Run)
$200 per run
10,000 units per run
=$.02 per unit
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Sheet1
Mode II: (4 Runs)
$200 per run
5,000 units per run
=$.04 per unit
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Mode III: (10 Runs)
$200 per run
400 units per run
=$.50 per unit
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Sheet6
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5-*Various overheadcosts relatedto engineeringEngineering salariesEngineering suppliesEngineering softwareDepreciationEngineering Cost PoolTotal budgeted cost = $700,000ActivitycostpoolSTAGE ONE
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5-*Allocate basedon engineeringtransactionsCostAssignmentSTAGE TWOEngineering Cost PoolTotal budgeted cost = $700,000
Sheet1
Mode I:
25% $700,000
10,000 units
=$17.50 per unit
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Mode II:
45% $700,000
20,000 units
=$15.75 per unit
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Mode III:
30% $700,000
4,000 units
=$52.50 per unit
Sheet2
Sheet3
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Sheet6
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5-*Various overheadcosts relatedto generaloperationsPlant depr.Plant mgmt.Plant maint.Property taxesInsuranceSecurityFacility Cost PoolTotal budgeted cost = $507,400ActivitycostpoolSTAGE ONE
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5-* Budgeted Facilities Cost $507,400Budgeted Direct-Labor Hours 118,000 $4.30/hourCostAssignmentSTAGE TWO==Calculatethe poolrate
Sheet1
Mode I:
$4.30per hr.
3hr. per unit
$12.90per unit
Sheet2
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Sheet1
Mode II:
$4.30per hr.
4hr. per unit
$17.20per unit
Sheet2
Sheet3
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Sheet6
Sheet1
Mode III:
$4.30per hr.
2hr. per unit
$8.60per unit
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Sheet6
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5-*Other Overhead Costs
Sheet1
Receiving and Inspection Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$200,0006%10,000=$1.20
Mode II200,00024%20,000=2.40
Mode III200,00070%4,000=35.00
Sheet2
Sheet3
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Sheet6
Sheet1
Material-Handling Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$600,0007%10,000=$4.20
Mode II600,00030%20,000=9.00
Mode III600,00063%4,000=94.50
Sheet2
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Sheet6
Sheet1
Quality-Assurance Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$421,00020%10,000=$8.42
Mode II421,00040%20,000=8.42
Mode III421,00040%4,000=42.10
Sheet2
Sheet3
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Sheet6
Sheet1
Packaging and Shipping Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$250,0004%10,000=$1.00
Mode II250,00030%20,000=3.75
Mode III250,00066%4,000=41.25
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Sheet6
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5-*Other Overhead Costs$14.82
Sheet1
Packaging and Shipping Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$250,0004%10,000=$1.00
Mode II250,00030%20,000=3.75
Mode III250,00066%4,000=41.25
Sheet2
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Sheet6
Sheet1
Quality-Assurance Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$421,00020%10,000=$8.42
Mode II421,00040%20,000=8.42
Mode III421,00040%4,000=42.10
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Receiving and Inspection Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$200,0006%10,000=$1.20
Mode II200,00024%20,000=2.40
Mode III200,00070%4,000=35.00
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet1
Material-Handling Cost Pool
BoardOverhead%Units=Cost/Unit
Mode I$600,0007%10,000=$4.20
Mode II600,00030%20,000=9.00
Mode III600,00063%4,000=94.50
Sheet2
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5-*Product Cost from ABCThese are the new product costs when Aerotech uses ABC.
Sheet1
Mode IMode IIMode III
Direct materials$50.00$90.00$20.00
Direct labor60.0080.0040.00
Machinery28.2035.2556.40
Setup0.020.040.50
Engineering17.5015.7552.50
Facilities12.9017.208.60
Other14.8223.57212.85
Total$183.44$261.81$390.85
Sheet2
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5-*Distorted Product CostsBoth original and ABC target selling prices are based on (Cost 125%).[$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.
Sheet1
Mode IMode IIMode III
Traditional costing$209.00$302.00$126.00
ABC costing183.44261.81390.85
Original target selling price261.25377.50157.50
ABC target selling price229.30327.26488.56
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5-*Can you identify any problems Aerotech is likely to face as a result of this distortion?Traditional costing understates the costof complex, low volume products.Distorted Product Costs
Sheet1
Mode IMode IIMode III
Traditional costing$209.00$302.00$126.00
ABC costing183.44261.81390.85
Cost distortion per unit25.5640.19(264.85)
Units produced10,00020,0004,000
Total cost distortion255,600803,800(1,059,400)
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5-*Two Key Points
A large proportion of non-unit-level activities A unit-level cost driver, such as direct labor, machine hours, or throughput, will not be able to assign the costs of non-unit-level activities accurately.
Product diversity When the consumption ratios differ widely between activities, no single cost driver will accurately assign the resulting overhead costs.
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5-*Cost DriversA characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . .Degree ofCorrelationCost ofMeasurementBehavioralEffects
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5-*Activity-Based Management
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5-*Activity-Based ManagementActivity-based costing establishes relationships between overhead costs and activities so that we can better allocate overhead costs.Activity-based management focuses on managing activities to reduce costs.
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5-*Two-Dimensional ABC and Activity-Based Management
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5-*Two-Dimensional ABC and Activity-Based Management
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5-*Two-Dimensional ABC and Activity-Based Management
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5-*Elimination of Non-Value-Added CostsNonvalue-added activitiesNecessaryUnnecessaryActivitiesReduce or EliminateContinually Evaluate and Improve
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5-*Using ABM to Eliminate Non-Value-Added Activities and CostsInspection timeProcess timeStorage timeMove timeWaiting time
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5-*Just-in-Time Inventory and Production ManagementNo materials are purchased and no products are manufactured until they are needed.The primary goal of aJIT production system isto reduce or eliminateinventories at everystage of production.
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5-*Key Features of the JIT ApproachSmooth, uniform production ratePull method of productionPurchase is small lot sizesQuick, inexpensive setupsHigh quality materialsEffective preventive maintenanceTeamworkMultiskilled workers
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5-*JIT PurchasingLong-termcontracts withsuppliers.Only a fewsuppliers.Parts deliveredin small lots.Minimalinspection ofmaterials.Groupedpayments tovendor.
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5-*End of Chapter 5This ismy kind of cost pool!