chapter 3 activity-based management. 2 activity-based costing & management (abcm) (slide 1 of 4)...
TRANSCRIPT
2
Activity-based Costing & Management (ABCM)(Slide 1 of 4)
• ABCM rests on this premise:
– Products and services require/consume activities and activities consume resources
• To understand the cost of a product or service, one must:
– Identify activities required to make the product or provide the service
3
Activity-based Costing & Management(ABCM)(Slide 2 of 4)
– Identify resources used to provide for those activities
– Determine the cost of those resources
• To be competitive, managers must know both:
– Activities involved in making the goods or providing the services, and
– The cost of those activities
4
Activity-based Costing & Management (ABCM) (Slide 3 of 4)
• ABCM has 2 parts: What are they?
– The costing part known as Activity-based Costing (ABC)
– The management part known as Activity-Based Management (ABM)
5
Activity-based Costing & Management (ABCM) (Slide 4 of 4)
• ABC treats mostly indirect costs including:
– Overhead costs related to the manufacture of a product or providing a service
– Indirect costs of marketing a product
– Indirect costs of managing a company
6
Discuss Strategic Uses of ABCM
• Managers use activity-based information in what 5 ways?
1. To add surcharges for particular customers
2. To “fire” some customers
3. To seek to serve more profitable customers
4. To raise or lower product prices
5. To drop products
7
What are the 4 steps of activity analysis?
1. Chart the activities used to complete the product or service
2. Classify activities as value-added or non-value-added
3. Eliminate or reduce non-value-added activities
4. Continuously improve & reevaluate efficiency of activities or replace them with more efficient activities
8
Define Cost Pools
• Cost pools are groups of costs
• List three major types of cost pools:
– Plant (traditional)
– Department (traditional)
– Activity center (activity-based costing)
9
Product Costing Allocation MethodsProduct Costing Allocation Methods
PPRROODDUUCCTTSS
Plantwide Overhead RatePlantwide Overhead Rate
Multiple Department RatesMultiple Department Rates
Activity-Based CostingActivity-Based Costing
Activity
Department
Activity
Department
Single Rate
10
Discuss Traditional Allocation Methods
• Plantwide allocation
– Uses the entire plant as a cost pool
– This approach is best for simple organizations with only a few departments and little variety in activities
• Department allocation
– Uses separate cost pools with different overhead allocation rates for each department
11
Discuss Activity-Based Costing
• Activity-based costing (ABC)
– Assigns costs first to activities
– Then to products or services based on the activities used to produce the product or provide the service
12
Single Plantwide Factory Overhead RateSingle Plantwide Factory Overhead Rate
Total budgeted factory overhead costs
Total budgeted plantwide allocation base
= $80 per hour$1,600,000
20,000 direct labor hours
Snowmobile:$80 x 10 direct labor hours = $800
Lawnmower:$80 x 10 direct labor hours = $800
What are the advantages of the single plantwide overhead rate method?
What are the advantages of the single plantwide overhead rate method?
13
Multiple Department Factory Overhead RateMultiple Department Factory Overhead Rate
Fabrication Department Overhead Rate:
= $103 per hour$1,030,000
10,000 direct labor hours
Snowmobile:Fabrication: $103 x 8 dlh $824Assembly: $57 x 2 dlh 114 $938
Lawnmower:Fabrication: $103 x 2 dlh $206Assembly: $57 x 8 dlh 456 $662
Assembly Department Overhead Rate:
= $57 per hour$570,000
10,000 direct labor hours
14
Conditions for Product Cost DistortionConditions for Product Cost Distortion
Fabrication Fabrication DepartmentDepartment
$103 per directlabor hour
$103 per directlabor hour
Assembly Assembly DepartmentDepartment
Condition 1:Different department overhead rates
$57 per directlabor hour
$57 per directlabor hour
Condition 2:Different ratios of allocation-base usage
Snowmobile8 direct 2 direct
labor hours labor hours
Snowmobile8 direct 2 direct
labor hours labor hours
Lawnmower2 direct 8 direct
labor hours labor hours
Lawnmower2 direct 8 direct
labor hours labor hours
15
What are the required steps of activity-based costing?
1. Identify activities that consume resources and assign costs to those activities
2. Identify cost drivers associated with each activity
– A cost driver is a factor that causes or “drives” an activity’s costs
3. Compute a cost rate for each cost driver4. Assign costs to products
16
Cost Rates per Cost Driver Unit
• Calculate predetermined cost rate for each cost driver as follows:
Predetermined = Estimated indirect cost cost rate Est. volume of allocation base
Multiply predetermined cost driver rate times volume of cost drivers consumed
17
Activity-Based CostingActivity-Based Costing
Activity Amount Activity Rate
Fabrication $ 530,000 / 10,000 dlh = $53Assembly 70,000 / 10,000 dlh = $7Setup 480,000 / 120 setups = $4,000Quality control 312,000 / 104 insps. = $3,000Engineering 208,000 / 16 changes = $13,000 Total $1,600,000
18
Activity-Based CostingActivity-Based Costing
Activity Amount Activity Rate
Snowmobile 8,000 $53 $424,000Lawnmower 2,000 53 106,000 Total 10,000 $530,000
Fabrication: DL Hours Rate Total
Fabrication $ 530,000 / 10,000 dlh = $53Assembly 70,000 / 10,000 dlh = $7Setup 480,000 / 120 setups = $4,000Quality control 312,000 / 104 insps. = $3,000Engineering 208,000 / 16 changes = $13,000 Total $1,600,000
19
Activity-Based CostingActivity-Based Costing
Snowmobile 2,000 $7 $14,000Lawnmower 8,000 7 56,000 Total 10,000 $70,000
Assembly: DL Hours Rate Total
Fabrication $ 530,000 / 10,000 dlh = $53Assembly 70,000 / 10,000 dlh = $7Setup 480,000 / 120 setups = $4,000Quality control 312,000 / 104 insps. = $3,000Engineering 208,000 / 16 changes = $13,000 Total $1,600,000
Activity Amount Activity Rate
20
Activity-Based CostingActivity-Based Costing
Snowmobile 100 $4,000 $400,000Lawnmower 20 4,000 80,000 Total 120 $480,000
Setup: Setups Rate Total
Fabrication $ 530,000 / 10,000 dlh = $53Assembly 70,000 / 10,000 dlh = $7Setup 480,000 / 120 setups = $4,000Quality control 312,000 / 104 insps. = $3,000Engineering 208,000 / 16 changes = $13,000 Total $1,600,000
Activity Amount Activity Rate
21
Activity-Based CostingActivity-Based Costing
Snowmobile 100 $3,000 $300,000Lawnmower 4 3,000 12,000 Total 104 $312,000
Quality Control: Insps. Rate Total
Fabrication $ 530,000 / 10,000 dlh = $53Assembly 70,000 / 10,000 dlh = $7Setup 480,000 / 120 setups = $4,000Quality control 312,000 / 104 insps. = $3,000Engineering 208,000 / 16 changes = $13,000 Total $1,600,000
Activity Amount Activity Rate
22
Activity-Based CostingActivity-Based Costing
Snowmobile 12 $13,000 $156,000Lawnmower 4 13,000 52,000 Total 16 $208,000
Engineering: Changes Rate Total
Fabrication $ 530,000 / 10,000 dlh = $53Assembly 70,000 / 10,000 dlh = $7Setup 480,000 / 120 setups = $4,000Quality control 312,000 / 104 insps. = $3,000Engineering 208,000 / 16 changes = $13,000 Total $1,600,000
Activity Amount Activity Rate
23
Activity-Based CostingActivity-Based Costing
Activity Snowmobile Mower Total
Cost Allocation Summary:
Fabrication $ 424,000 $106,000 $ 530,000Assembly 14,000 56,000 70,000Setup 400,000 80,000 480,000Quality control 300,000 12,000 312,000Engineering 156,000 52,000 208,000 Total $1,294,000 $306,000 $1,600,000
Budgeted units 1,000 1,000 Cost per unit $1,294 $306
24
Distortion in Product CostsDistortion in Product Costs
Single plantwide rate $ 800 $ 800Multiple department rates 938 662Activity-based costing 1,294 306
Snowmobile Lawnmower
Factory Overhead Cost per Unit:
25
1. Post-sale technical support
2. Order writing
3. Promotional support
4. Order entry
5. Customer return processing
6. Shipping document preparation
7. Shipping and handling
8. Field service
Selling and administrative activities may include:
Selling and Administrative ActivitiesSelling and Administrative Activities
26
Activity-Based Costing in Service BusinessesActivity-Based Costing in Service Businesses
PPAATTIIEENNTTSS
$200 per hour
Hopewell Hospital—Activity-Based Costing
$120 per specimen
$150 per day
$320 per image
$180 per admissionAdmittingAdmitting
RadiologicalRadiologicalTestingTesting
Operating Operating RoomRoom
PathologicalPathologicalTestingTesting
Dietary andDietary andLaundryLaundry
27
Activity Costs Allocated to a PatientActivity Costs Allocated to a Patient
Activity-Base Activity ActivityActivity Usage Rate Cost
Admitting 1 admission $180 $ 180Radiology testing 2 images 320 640Operating room 4 hours 200 800Pathological testing 1 specimen 120 120Dietary and laundry 7 days 150 1,050 Total $2,790
Patient Name: Mary Wilson