ABC by Carsten BerkauProf. Dr. Carsten Berkau page: 6 - Controlling - CPUT.pp t 11..2288 CPUT -...

page: 1Prof. Dr. Carsten BerkauProf. Dr. Carsten Berkau

- Controlling -

CPUT.ppt

1.1.11CPUT - 6.08.2010

University of Applied Sciences

© Prof Dr Carsten Berkau, 2010

This slide can be accessed

at my website: www.Prof-Berkau.de;

use: FHOSStudent (Remarque)

CO

NT

RO

LLIN

G

ABCABC

by Carsten Berkauby Carsten Berkau


- Controlling -

CPUT.ppt

1.1.22CPUT - 6.08.2010






CO

NT

RO

LLIN

G

ControllingControlling

FH OsnabrückFH Osnabrück


- Controlling -

CPUT.ppt

1.1.33CPUT - 6.08.2010






CO

NT

RO

LLIN

G


- Controlling -

CPUT.ppt

1.1.44CPUT - 6.08.2010






CO

NT

RO

LLIN

G

OsnabrückOsnabrück


- Controlling -

CPUT.ppt

1.1.2727CPUT - 6.08.2010






CO

NT

RO

LLIN

G

(1)(1) FH Osnabrück (www.fhFH Osnabrück (www.fh--osnabrueck.de)osnabrueck.de)

(2) Controlling Department(2) Controlling Department

(3) Teaching Controlling(3) Teaching Controlling

(4) EDP(4) EDP

(4.1) Case Study(4.1) Case Study

(4.2) SAP System R/3(4.2) SAP System R/3

(4.3) SAP System BW(4.3) SAP System BW

(4.4) Planspiel(4.4) Planspiel


- Controlling -

CPUT.ppt

1.1.2828CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Struktur des BachelorstudiengangsStruktur des Bachelorstudiengangs

Controlling – Grundlagen des Controlling und der Kosten- und Leistungsrechnung

Rechnungswesen/Accounting – (IFRSs und HGB)

Rechnungswesen 1 - Propädeutikum

M1: Strategisches und Projektcontrolling

BACHELOR

M2: Kostencontrolling und Budgetierung

M3: Reporting in Einzel-U. und Konzernen

Master CFO: Prozess- und Projekt-Ctrl., Strat. Ctrl. mit SEM, Corporate Finance, Financial Management and Accounting, Risk Management, Financial Control mit BW

MASTER


- Controlling -

CPUT.ppt

1.1.2929CPUT - 6.08.2010






CO

NT

RO

LLIN

G

ControllingControlling--WebsiteWebsite


- Controlling -

CPUT.ppt

1.1.3030CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Becoming a CFO (Becoming a CFO (Controlling&FinanceControlling&Finance in in OsnabrückOsnabrück) ...) ...


- Controlling -

CPUT.ppt

1.1.3131CPUT - 6.08.2010






CO

NT

RO

LLIN

G

CFOCFO--MasterMaster


- Controlling -

CPUT.ppt

1.1.3333CPUT - 6.08.2010






CO

NT

RO

LLIN

G

(1)(1) FH Osnabrück (www.fhFH Osnabrück (www.fh--osnabrueck.de)osnabrueck.de)

(2) Controlling Department(2) Controlling Department

(3) Teaching Controlling(3) Teaching Controlling

(4) EDP(4) EDP

(4.1) Case Study(4.1) Case Study

(4.2) SAP System R/3(4.2) SAP System R/3

(4.3) SAP System BW(4.3) SAP System BW

(4.4) Planspiel(4.4) Planspiel


- Controlling -

CPUT.ppt

1.1.3636CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Cost Accounting SystemCost Accounting System

Berkau, C.: Activity Based Management. Part 2: ABC-Costing. 2nd edition.

Enschede 2001, pg. 13

Cost Element Accounting

Direct Costs Overheads

Cost Center Accounting

CCe XXX

prop. fixed

CCe YYY

prop. fixed

Calculation

Unit costs

ProfitabilityAnalysis

Contribution margin

Profit

Financial Accounting

Rate, Variance

G/L Accounts


- Controlling -

CPUT.ppt

1.1.4848CPUT - 6.08.2010






CO

NT

RO

LLIN

G

SAP IntroductionSAP Introduction

Login and FB50Login and FB50


- Controlling -

CPUT.ppt

1.1.4949CPUT - 6.08.2010






CO

NT

RO

LLIN

G

ContentsContents

- Activity based costing vs. traditional ManAcc

- Level of ABC costing

- Business Process Modelling (BPM)

- German prozesskostenrechnung

- Software solutions

- Case Studies


- Controlling -

CPUT.ppt

1.1.5050CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Part (12): Activity Based CostingPart (12): Activity Based Costing

(ABC(ABC--Costing)Costing)


- Controlling -

CPUT.ppt

1.1.5151CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Business Example INSTEEL INDUSTRIESBusiness Example INSTEEL INDUSTRIES

INSTEEL INDUSTRIES manufactures concrete reinforcing steel, industrialwire, and bulk nails. The company implemented an ABC system in its manufacturing plant in Andrews, South Carolina, and immediately began using ABC data to make strategic and operating decisions.

In terms of strategic decisions INSTEEL dropped some unprofitable products, rises prices on others, and in come cases even discontinued relationships with unprofitable customers. INSTEEL realized that simply discontinuing products and customers does not improve profits. The company needed to either redeploy its freed-up capacity to increase sales or to reduce costs. INSTEEL used its ABC system to identify which new business opportunities to pursue.

In terms of operational improvements the ABC system revealed that its 20 most expensive activities consumed 87% of the plant’s $21,400,000 in cost. Almost $4,900,000 was being consumed by non-value-added activities. Teams were formed to reduce scrap costs, material handling and freight costs, and maintenance costs. Within on year scrap and maintenance costs had been cut by $1,800,000 and freight costs by $550,000. Overall, non value-added activity costs dropped from 23% to 17% of total costs.


- Controlling -

CPUT.ppt

1.1.5252CPUT - 6.08.2010






CO

NT

RO

LLIN

G

ABC SystemABC System

Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect (1) capacity and therefore (2) fixed as well as (3) variable costs.

An ABC system is ordinary used as a supplement to, rather than a replacement for, a company’s usual costing system.


- Controlling -

CPUT.ppt

1.1.5353CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Further ConsiderationFurther Consideration

Traditional absorption costing is designed to provide data for external financial reports. In contrast, ABC is designed to be used for internal decision making.

MAIN DIFFERENCES:(1) In ABC nonmanufacturing as well as manufacturing costs may be assigned to products, but only by a cause-and-effect basis

(2) Some manufacturing costs may be excluded from product costs (see example CLASSIC BRASS coming up).

(3) Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.


- Controlling -

CPUT.ppt

1.1.5454CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Conditions changed …Conditions changed …

In most of the 20th century cost system design were simple. Only few cost pools (departments) were in use. Overheads were allocated on a labor-hour or machine-hour bases. Labor was a common overhead allocation base because it represented a large component of product costs.

Now, these conditions have changed. As a percentage of total cost, direct labor, declined and overhead increased. By using more machines direct labor got replaced by depreciation, from the view of view of cost elements. Companies produce a huge variety of products. Managing and sustaining this product diversity requires to invest in more overhead resources.

This requires an ABC system to not distort product cost by too simple cost allocations.


- Controlling -

CPUT.ppt

1.1.5555CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Some DefinitionsSome Definitions

DEFINITIONS:(1) Activity

An activity is any event that causes the consumption of overheadresources.

(2) Activity cost poolAn activity cost pool is a “bucket” in which costs are accumulated thatrelate to a single activity measure in the ABC system.

(3) Activity measureAn Activity measure is an allocation bases. The term cost driver is alsoin use. There are (a) transaction drivers and (b) duration drivers.

(4) Levels of activityIn an ABC system there are 5 levels of activities related to the reasoncausing the activity occurrence: (I) unit-level activities, (II) batch-levelactivities, (III) product-level activities, (IV) customer-level activities, and(V) organization-sustaining activities


- Controlling -

CPUT.ppt

1.1.5656CPUT - 6.08.2010






CO

NT

RO

LLIN

G

ABC ModelABC Model

Cost Objects

Activities

Consumption of resources

Cost


- Controlling -

CPUT.ppt

1.1.5757CPUT - 6.08.2010






CO

NT

RO

LLIN

G

CLASSIC BRASS Case StudyCLASSIC BRASS Case Study

CLASSIC BRASS is a production firm. The company produces 2 products lines for parts for luxury yachts: (1) standard stanchions and (2) custom compass housings.

During 20X5 the business made a loss, see I/S provided below for fiscal year 20X5:

Item [$] [$]

Sales 3.200.000,00

less: Cost of goods sold

Direct materials 975.000,00

Direct labor 351.250,00

Manufacturing overhead 1.000.000,00

(2.326.250,00)

Gross margin 873.750,00

less: Shipping and admin expenses

Shipping expenses 65.000,00

Marketing expenses 300.000,00

General admin expenses 510.000,00

(875.000,00)

Net operating income (1.250,00)

CLASSIC BRASS INCOME STATEMENT for 20X5


- Controlling -

CPUT.ppt

1.1.5858CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Steps for Implementing ABCSteps for Implementing ABC

STEPS:(1) Define activities, activity cost pools, and activity measures

(2) Assign overhead costs to activity cost pools

(3) Calculate activity rates

(4) Assign overhead costs to cost objects using the activity rates and activity measures

(5) Prepare management reports


- Controlling -

CPUT.ppt

1.1.5959CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Cost Flow in CLASSIC BRASS ABC SystemCost Flow in CLASSIC BRASS ABC System

Direct

materials

Direct

labor

Shipping

cost

traced traced traced

Customer

orders

320,000.00

Product

design

252,000.00

Order

size

380,000.00

Customer

relations

367,500.00

Other

490,500.00

320.00

per order

630.00

per design

19.00

per MH

1,470.00

per customer

unallocatedCost objects:

products, customer orders, customers

Overhead cost

(manufacturing and non-manufacturing)

1,810,000.00


- Controlling -

CPUT.ppt

1.1.6060CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Activities identifiedActivities identified

CLASSIC BRASS identified the activities below. Note, there is a remaining cost pool.

For ABC costing start with less activities to reduce complexity and effort to gather data!

Acitivity cost pool Activity measure

Customer orders Number of customer orders

Product design Number of product designs

Order size Machine-hous

Customer relations Number of active customers

Other Not applicable

ACTIVITY COST POOLS


- Controlling -

CPUT.ppt

1.1.6161CPUT - 6.08.2010






CO

NT

RO

LLIN

G








- Controlling -

CPUT.ppt

1.1.6262CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Annual Overhead Costs to Cost PoolsAnnual Overhead Costs to Cost Pools

The ABC team at CLASSIC BRASS ran interviews with the departmental responsibles. No direct labor, direct materials or shipping expenses were assigned to cost pools.

Item [$] [$]

Production department

Indirect factory wages 500.000,00

Factory equipment depreciation 300.000,00

Factory utilities 120.000,00

Factory building lease 80.000,00

1.000.000,00

General administrative department

Administrative wages and salaries 400.000,00

Office equipment depreciation 50.000,00

Administrative building lease 60.000,00

510.000,00

Marketing department

Marketing wages and salaries 250.000,00

Selling expenses 50.000,00

300.000,00

Total overhead cost 1.810.000,00

CLASSIC BRASS OVERHEADS for 20X5


- Controlling -

CPUT.ppt

1.1.6363CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Results of Interviews (8Results of Interviews (8--4)4)

Customer

orders

Product

design Order size

Customer

relations Other totals


Indirect factory wages 25% 40% 20% 10% 5% 100%

Factory equipment depreciation 20% 0% 60% 0% 20% 100%

Factory utilities 0% 10% 50% 0% 40% 100%

Factory building lease 0% 0% 0% 0% 100% 100%

General Administrative department

Administrative wages and salaries 15% 5% 10% 30% 40% 100%

Office equipment depreciation 30% 0% 0% 25% 45% 100%

Administrative building lease 0% 0% 0% 0% 100% 100%


Marketing wages and salaries 22% 8% 0% 60% 10% 100%

Selling expenses 10% 0% 0% 70% 20% 100%

Activity Cost Pools


- Controlling -

CPUT.ppt

1.1.6464CPUT - 6.08.2010






CO

NT

RO

LLIN

G

First Stage Allocations (8First Stage Allocations (8--5)5)

Customer orders

Product

design

Order

size

Customer

relations Other totals


Indirect factory wages 125.000,00 200.000,00 100.000,00 50.000,00 25.000,00 500.000,00

Factory equipment depreciation 60.000,00 0,00 180.000,00 0,00 60.000,00 300.000,00

Factory utilities 0,00 12.000,00 60.000,00 0,00 48.000,00 120.000,00

Factory building lease 0,00 0,00 0,00 0,00 80.000,00 80.000,00

General Administrative department

Administrative wages and salaries 60.000,00 20.000,00 40.000,00 120.000,00 160.000,00 400.000,00

Office equipment depreciation 15.000,00 0,00 0,00 12.500,00 22.500,00 50.000,00

Administrative building lease 0,00 0,00 0,00 0,00 60.000,00 60.000,00


Marketing wages and salaries 55.000,00 20.000,00 0,00 150.000,00 25.000,00 250.000,00

Selling expenses 5.000,00 0,00 0,00 35.000,00 10.000,00 50.000,00

Total 320.000,00 252.000,00 380.000,00 367.500,00 490.500,00 1.810.000,00

Activity Cost Pools


- Controlling -

CPUT.ppt

1.1.6565CPUT - 6.08.2010






CO

NT

RO

LLIN

G








- Controlling -

CPUT.ppt

1.1.6666CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Computation of Activity Rates (8Computation of Activity Rates (8--6)6)

Activity cost pools

(a)

Total cost

Customer orders 320.000,00 1000 orders 320 per order

Product design 252.000,00 400 designs 630 per design

Order size 380.000,00 20000 MHs 19 per MH

Customer relations 367.500,00 250 customers 1470 per customer

Other 490.500,00

(b)

Total activity

(a) / (b)

Activity rate

Not applicable Not applicable


- Controlling -

CPUT.ppt

1.1.6767CPUT - 6.08.2010






CO

NT

RO

LLIN

G








- Controlling -

CPUT.ppt

1.1.6868CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Product DataProduct Data

STANDARD STANCHIONS:(1) This product line does not require any new design resources

(2) 30,000 units were ordered during the year, comprising 600 separate orders

(3) Each stanchion requires 35 min of machine time for a total of 17,500 machine hours.

CUSTOM COMPASS HOUSING(1) This is a custom product that requires new design resources

(2) There were 400 orders for custom compass housings. Orders for this product are paced separately from orders for standard stanchions.

(3) There were 400 custom designs prepared. One custom design was prepared for each order

(4) Since some orders were for more than one unit, a total of 1,250 custom compass housings were produced during the period. A custom compass housing requires an average of 2 machine hours (MHs) for a total of 2,500 MHs.


- Controlling -

CPUT.ppt

1.1.6969CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Assigning Overhead Costs to Products (8Assigning Overhead Costs to Products (8--8)8)

Overhead cost for the standard stanchions

Activity cost pools

(a) ∙ (b)

ABC cost

Customer orders 320 per order 600 orders 192.000,00

Product design 630 per design 0 design -

Order size 19 per MH 17.500 MH 332.500,00

Total 524.500,00

Overhead cost for custom compass housing

Activity cost pools

(a) ∙ (b)

ABC cost

Customer orders 320 per order 400 orders 128.000,00

Product design 630 per design 400 design 252.000,00

Order size 19 per MH 2500 MH 47.500,00

Total 427.500,00

(a)

Activity rate

(b)

Activity

(a)

Activity rate

(b)

Activity


- Controlling -

CPUT.ppt

1.1.7070CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Customer DataCustomer Data

WINDWARDS YACHTS(1) The company placed a total of 3 orders.

(a) Two orders were for 150 standard stanchions per order, (b) one order was for a single custom compass housing unit.

(2) A total of 177 machine hours were used to fulfill the tree customer orders.(a) The 300 standard stanchions required 175 machine-hours. (b) The custom compass housing required 2 machine-hours.

(3) WINDWARDS YACHTS in one of 250 customers served by CLASSIC BRASS.


- Controlling -

CPUT.ppt

1.1.7171CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Assigning Overhead Costs to Customers (8Assigning Overhead Costs to Customers (8--9)9)

Activity cost pools

(a) ∙ (b)

ABC cost

Customer orders 320 per order 3 orders 960,00

Product design 630 per design 1 designs 630,00

Order size 19 per MH 177 MHs 3.363,00

Customer relations 1.470 per customer 1 customer 1.470,00

Total OH assigned to customer 6.423,00

(a)

Activity rate

(b)

Activity

Overhead cost for WINDWARD YACHTS


- Controlling -

CPUT.ppt

1.1.7272CPUT - 6.08.2010






CO

NT

RO

LLIN

G








- Controlling -

CPUT.ppt

1.1.7373CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Direct Product Cost DataDirect Product Cost Data

STANDARD STANCHION(1) Sales 2,660,000.00 EUR

(2) Direct cost(a) Direct materials 905,500.00 EUR(b) Direct labor 263,750.00 EUR(c) Shipping 60,000.00 EUR

CUSTOM COMPASS HOUSING(1) Sales 540,000.00 EUR

(2) Direct cost(a) Direct materials 69,500.00 EUR(b) Direct labor 87,500.00 EUR(c) Shipping 5,000.00 EUR


- Controlling -

CPUT.ppt

1.1.7474CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Product Margins (8Product Margins (8--10)10)

Product margins-ABC

Sales 2.660.000,00 540.000,00

Costs:

Direct materials 905.500,00 69.500,00

Direct labor 263.750,00 87.500,00

Shipping 60.000,00 5.000,00

Customer orders (8-8) 192.000,00 128.000,00

Product design (8-8) 0,00 252.000,00

Order size (8-8) 332.500,00 47.500,00

Total cost -1.753.750,00 -589.500,00

Product margin 906.250,00 -49.500,00

Standard

stanchions

Custom

compass housing


- Controlling -

CPUT.ppt

1.1.7575CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Customer Margin (8Customer Margin (8--11)11)

Customer margin-ABC

Sales 11.350,00

Costs:

Direct materials 2.123,00

Direct labor 1.900,00

Shipping 205,00

Customer orders (8-9) 960,00

Product design (8-9) 630,00

Order size (8-9) 3.363,00

Customer relations (8-9) 1.470,00

Total of costs (10.651,00)

Customer margin 699,00

WINDWARD YACHTS


- Controlling -

CPUT.ppt

1.1.7676CPUT - 6.08.2010






CO

NT

RO

LLIN

G

Product Margins Traditional Costing System (8Product Margins Traditional Costing System (8--12)12)

Product margins - traditional costing system

Sales 2.660.000 540.000 3.200.000

Cost of goods sold

Direct materials 905.500 69.500 975.000

Direct labor 263.750 87.500 351.250

Manufacturing overhead 875.000 125.000 1.000.000

(2.044.250) (282.000) (2.326.250)

Product margin 615.750 258.000 873.750

Selling and admin expenses (875.000)

Net operating income (1.250)

Standard

stanchions Total

Custom

compass housing

ABC by Carsten BerkauProf. Dr. Carsten Berkau page: 6 - Controlling - CPUT.pp t 11..2288 CPUT -...

Documents

Transcript of ABC by Carsten BerkauProf. Dr. Carsten Berkau page: 6 - Controlling - CPUT.pp t 11..2288 CPUT -...