Post on 27-Dec-2015
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Chapter 5Chapter 5
Activity-Based Costing and Management
Activity-Based Costing and Management
Traditional, Volume-Based Traditional, Volume-Based Product-Costing SystemProduct-Costing System
1-2
• Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III.
• The following information is obtained from company records:
• Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III.
• The following information is obtained from company records:
Mode I Mode I I Mode I I IProduction: Units 10,000 20,000 4,000 Runs 1 run of 10,000
units 4 runs of
5,000 units 10 runs of 400 units
Traditional, Volume-Based Traditional, Volume-Based Product-Costing SystemProduct-Costing System
1-3
Additional information includes:Mode I Mode I I Mode I I I
Direct materials 50.00$ 90.00$ 20.00$ Direct labor (hr/board) 3 4 2 Setup time (hr/run) 10 10 10 Machine time (hr/board) 1 1.25 2
Manufacturing overhead is determined as follows
Traditional, Volume-Based Traditional, Volume-Based Product-Costing SystemProduct-Costing System
1-4
Budgeted manufacturing overhead Budgeted manufacturing overhead $3,894,000 $3,894,000 Budgeted direct-labor hours 118,000Budgeted direct-labor hours 118,000 = $33 per hour= $33 per hour
Traditional, Volume-Based Traditional, Volume-Based Product-Costing SystemProduct-Costing System
1-5
With these product costs, Aerotech established target selling prices (Cost × 125%).
209.00 x 1.25
Activity Based Costing System Activity Based Costing System (ABC)(ABC)
1-6
ABC systems follow a two-stage two-stage procedure to assign overhead costs to products.
Stage OneIdentify significant activities and assign overhead costs to each activity in proportion to resources used.
Stage TwoIdentify cost drivers appropriate to each activity and allocate overhead to the products.
1-7
Overhead CostsOverhead CostsTotal budgeted cost = $3,894,000Total budgeted cost = $3,894,000
ActivityActivityCostCostPoolsPools
MachineryMachinerycost poolcost pool
$1,212,600$1,212,600
SetupSetupcost poolcost pool$3,000$3,000
EngineeringEngineeringcost poolcost pool$700,000$700,000
FacilityFacilitycost poolcost pool$507,400$507,400
UnitLevel
BatchLevel
Product-Sustaining
Level
FacilityLevel
Identificationof ActivityCost Pools
Identificationof ActivityCost Pools
ActivityActivitymust bemust bedone ondone oneach uniteach unitproduced.produced.
ActivityActivityperformedperformedon eachon eachbatchbatch
produced.produced.
Activities needed to supportActivities needed to supportan entire product linean entire product line
Activity required in orderActivity required in orderfor the productionfor the productionprocess to occur.process to occur.
1-8
Receiving/InspectionReceiving/Inspectioncost pool cost pool $200,000$200,000
Material-HandlingMaterial-Handlingcost pool cost pool $600,000$600,000
Quality-AssuranceQuality-Assurancecost pool cost pool $421,000$421,000
Packaging/ShippingPackaging/Shippingcost pool cost pool $250,000$250,000
MachineryMachinerycost poolcost pool
$1,212,600$1,212,600
SetupSetupcost poolcost pool$3,000$3,000
EngineeringEngineeringcost poolcost pool$700,000$700,000
FacilityFacilitycost poolcost pool$507,400$507,400
UnitLevel
BatchLevel
Product-Sustaining
LevelFacilityLevel
STAGE ONESTAGE ONE
1-9
Machinery Cost PoolMachinery Cost PoolTotal budgeted cost = $1,212,600
Maintenance
Depreciation
Computer Support
Lubrication
Electricity
Calibration
ActivityActivitycostcostpoolpool
Various overheadVarious overheadcosts relatedcosts relatedto to machinerymachinery
STAGE TWOSTAGE TWO
1-10
CalculateCalculatethe poolthe pool
raterate
Budgeted Machinery Costs $1,212,600 Budgeted Machine Hours 43,000 $28.20/hour$28.20/hour
CostCostAssignmentAssignment
=
=
STAGE ONESTAGE ONE
1-11
Calculation ofCalculation oftotal total setup costsetup cost
Setup Cost PoolSetup Cost PoolTotal budgeted cost = $3,000
ActivityActivitycostcostpoolpool
STAGE TWOSTAGE TWO
1-12
CalculateCalculatethe poolthe pool
raterate
Budgeted Setup Costs $3,000Planned Production Runs 15 runs $200 per run$200 per run
CostCostAssignmentAssignment
=
=
STAGE ONESTAGE ONE
1-13
Various overheadVarious overheadcosts relatedcosts related
to to engineeringengineering
Engineering salaries
Engineering supplies
Engineering software
Depreciation
Engineering Cost PoolEngineering Cost PoolTotal budgeted cost = $700,000
ActivityActivitycostcostpoolpool
STAGE TWOSTAGE TWO
1-14
Allocate basedAllocate basedon on engineeringengineering
transactionstransactions
CostCostAssignmentAssignment
Engineering Cost PoolEngineering Cost PoolTotal budgeted cost = $700,000
STAGE ONESTAGE ONE
1-15
Various overheadVarious overheadcosts relatedcosts related
to to generalgeneraloperationsoperations
Plant depr.
Plant mgmt.
Plant maint.
Property taxes
Insurance
Security
Facility Cost PoolFacility Cost PoolTotal budgeted cost = $507,400
ActivityActivitycostcostpoolpool
STAGE TWOSTAGE TWO
1-16
Budgeted Facilities Cost $507,400Budgeted Direct-Labor Hours 118,000 $4.30/hour$4.30/hour
CostCostAssignmentAssignment
=
=CalculateCalculatethe poolthe pool
raterate
Other Overhead CostsOther Overhead Costs
1-17
Board Overhead × % ÷ Units = Cost/UnitMode I 200,000$ × 6% ÷ 10,000 = 1.20$ Mode II 200,000 × 24% ÷ 20,000 = 2.40 Mode III 200,000 × 70% ÷ 4,000 = 35.00
Receiving and Inspection Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 600,000$ × 7% ÷ 10,000 = 4.20$ Mode II 600,000 × 30% ÷ 20,000 = 9.00 Mode III 600,000 × 63% ÷ 4,000 = 94.50
Material-Handling Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 421,000$ × 20% ÷ 10,000 = 8.42$ Mode II 421,000 × 40% ÷ 20,000 = 8.42 Mode III 421,000 × 40% ÷ 4,000 = 42.10
Quality-Assurance Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 250,000$ × 4% ÷ 10,000 = 1.00$ Mode II 250,000 × 30% ÷ 20,000 = 3.75 Mode III 250,000 × 66% ÷ 4,000 = 41.25
Packaging and Shipping Cost Pool
Other Overhead CostsOther Overhead Costs
1-18
Board Overhead × % ÷ Units = Cost/UnitMode I 250,000$ × 4% ÷ 10,000 = 1.00$ Mode II 250,000 × 30% ÷ 20,000 = 3.75 Mode III 250,000 × 66% ÷ 4,000 = 41.25
Packaging and Shipping Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 421,000$ × 20% ÷ 10,000 = 8.42$ Mode II 421,000 × 40% ÷ 20,000 = 8.42 Mode III 421,000 × 40% ÷ 4,000 = 42.10
Quality-Assurance Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 200,000$ × 6% ÷ 10,000 = 1.20$ Mode II 200,000 × 24% ÷ 20,000 = 2.40 Mode III 200,000 × 70% ÷ 4,000 = 35.00
Receiving and Inspection Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 600,000$ × 7% ÷ 10,000 = 4.20$ Mode II 600,000 × 30% ÷ 20,000 = 9.00 Mode III 600,000 × 63% ÷ 4,000 = 94.50
Material-Handling Cost Pool
$14.82$14.82
Product Cost from ABCProduct Cost from ABC
1-19
These are the new product costs when Aerotech uses ABC.
Distorted Product CostsDistorted Product Costs
1-20
Both 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 reducedThe selling price of Mode I and II are reducedand the selling price for Mode III is increased.and the selling price for Mode III is increased.
Distorted Product CostsDistorted Product Costs
1-21
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.
Two Key PointsTwo Key Points
1-22
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.
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.
Product diversity When the consumption ratios differ widely between activities, no single cost driver will accurately assign the resulting overhead costs.
Activity-Based ManagementActivity-Based Management
1-23
The use ofABC costing information
to helpmanagement
make decisions
Activity-Based ManagementActivity-Based Management
1-24
Activity-based costing establishes relationshipsbetween overhead costs and activities so that
we can better allocate overhead costs.
Activity-based management focuses on managing activities to reduce costs.
Two-Dimensional ABC and Two-Dimensional ABC and Activity-Based ManagementActivity-Based Management
1-25
ActivitiesActivities
Two-Dimensional ABC and Two-Dimensional ABC and Activity-Based ManagementActivity-Based Management
1-26
Cost ObjectsCost ObjectsCost ObjectsCost Objects
ActivitiesActivities
Resource costsResource costsResource costsResource costs
Cost Assignment ViewCost Assignment View
Two-Dimensional ABC and Two-Dimensional ABC and Activity-Based ManagementActivity-Based Management
1-27
ActivityActivityTriggersTriggersActivityActivityTriggersTriggers
Cost ObjectsCost ObjectsCost ObjectsCost Objects
ActivitiesActivitiesRootRoot
CausesCausesRootRoot
CausesCauses
Process ViewProcess ViewActivity AnalysisActivity Analysis
Resource costsResource costsResource costsResource costs
Cost Assignment ViewCost Assignment View
PerformancePerformanceMeasuresMeasures
PerformancePerformanceMeasuresMeasures
Activity EvaluationActivity Evaluation
Elimination of Non-Value-Added Elimination of Non-Value-Added CostsCosts
1-28
Nonvalue-added
activities
NecessaryNecessaryUnnecessaryUnnecessary
ActivitiesActivities
Reduce orReduce orEliminateEliminate
Continually Evaluate Continually Evaluate
and Improveand Improve
1-29
Customer Profitability AnalysisCustomer Profitability Analysis
Customer profitability analysis usesactivity-based costing to determine
the activities, costs, and profit associated with serving particular customers.
1-30
Customer Profitability AnalysisCustomer Profitability Analysis
Orderssmall
quantities.
Ordersfrequently.
Oftenchangesorders.
Requiredspecial
packaging.
Demandfast
service.
A costly customer
Just-in-Time Inventory and Just-in-Time Inventory and Production ManagementProduction Management
1-31
No materials are purchased and no products are manufactured until they are needed.
The primary goal of aThe primary goal of aJIT production system isJIT production system is
to reduce or eliminateto reduce or eliminateinventories at everyinventories at everystage of production.stage of production.
The primary goal of aThe primary goal of aJIT production system isJIT production system is
to reduce or eliminateto reduce or eliminateinventories at everyinventories at everystage of production.stage of production.