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Transcript of Introduction to Accounting
A&MIS 525 1
Introduction to Accounting
Activity Based Costing:A Tool to Aid Decision Making
Session 10
February 7,2002
A&MIS 525 2
Activity Based Costing (ABC)
The objective of activity-based costing is to understand
overhead and the profitability of products and customers.
ABC is agood supplement to our traditional
cost systemI agree!
A&MIS 525 3
Overhead rates maybe based on activity
at capacity.
Overhead rates maybe based on activity
at capacity.
Activity Based Costing (ABC)
Activity-Based CostingActivity-Based Costing
Both manufacturingand nonmanufacturing
costs may be assigned toproducts.
Both manufacturingand nonmanufacturing
costs may be assigned toproducts.
Some manufacturingcosts may be excluded
from productcosts.
Some manufacturingcosts may be excluded
from productcosts.
There are a numberof cost pools each of
which is allocatedusing a unique
measure of activity.
There are a numberof cost pools each of
which is allocatedusing a unique
measure of activity.
Allocation bases oftendiffer from
traditional costingsystems.
Allocation bases oftendiffer from
traditional costingsystems.
A&MIS 525 4
How Costs are Treated Under Activity-Based Costing
Level of C
omplexity
Level of C
omplexity
Overhead Allocation
Plantwide Overhead
Rate
Plantwide Overhead
Rate
DepartmentalOverhead
Rates
DepartmentalOverhead
Rates
Activity BasedCosting
Activity BasedCosting
A&MIS 525 5
Plantwide Overhead Rate
Companies tend to use direct labordirect labor as the overhead allocation base.
6 A&MIS 525
A two stage process isnecessary because costs
are allocated to departmentsand then to products.
A two stage process isnecessary because costs
are allocated to departmentsand then to products.
Finishing Department
Shipping Department
Painting Department
Departmental Overhead Rates
A&MIS 525 7
Department1
Department2
Department3Cost poolsCost pools
IndirectLabor
IndirectLabor
IndirectMaterialsIndirect
MaterialsOther
OverheadOther
OverheadStage One:Stage One:Costs assignedCosts assignedto poolsto pools
Departmental Overhead Rates
A&MIS 525 8
Department1
Department2
Department3Cost poolsCost pools
Stage One:Stage One:Costs assignedCosts assignedto poolsto pools
Products Products
Stage Two:Stage Two:Costs appliedCosts appliedto productsto products
Departmental Overhead Rates
IndirectLabor
IndirectLabor
IndirectMaterialsIndirect
MaterialsOther
OverheadOther
Overhead
A&MIS 525 9
Department1
Department2
Department3Cost poolsCost pools
Stage One:Stage One:Costs assignedCosts assignedto poolsto pools
Products Products
Stage Two:Stage Two:Costs appliedCosts appliedto productsto products
Direct Labor Hours
MachineHours
RawMaterials
Cost
Departmental Allocation Bases
Departmental Overhead Rates
IndirectLabor
IndirectLabor
IndirectMaterialsIndirect
MaterialsOther
OverheadOther
Overhead
A&MIS 525 10
Designing an ABC System
Cost Objects(e.g., products
and customers)
Cost Objects(e.g., products
and customers)ActivitiesActivities Consumption
of Resources
Consumptionof Resources
CostCost
A&MIS 525 11
Designing an ABC System
Steps for Implementing ABCSteps for Implementing ABCIdentify and define activities and activity pools.Where possible, trace costs to activities and cost
objects.Assign costs to activity cost pools.Calculate activity rates.Assign costs to cost objects.Prepare management reports.
A&MIS 525 12
Identifying Activity to Include
A part of the productionA part of the productionprocess for which managementprocess for which management
wants a separate reporting of thewants a separate reporting of thecosts of the activity involved.costs of the activity involved.
Unit-LevelActivity
Batch-Level Activity
Product-LevelActivity
Customer-LevelActivityOrganization-
sustainingActivity
A&MIS 525 13
Identifying Activity to Include
Activity Cost Activity Cost PoolPool is a “bucket” in which costs are accumulated that relate to a single
activity in the ABC system.
$
$
$ $
$$
A&MIS 525 14
The Mechanics of ABC
At Classic Brass, the ultimate cost objects are:Products,Customer orders, andCustomers.
One overhead cost - shipping - can be traced directly to customer orders.
The company’s overhead costs are shown on the next slide.
A&MIS 525 15
Production DepartmentIndirect factory wages 500,000$ Factory equipment depreciation 300,000 Factory utilities 120,000 Factory building lease 80,000 1,000,000$
Shipping costs traced to customer orders 40,000 General Administrative Department
Administrative wages and salaries 400,000 Office equipment depreciation 50,000 Administrative building lease 60,000 510,000
Marketing DepartmentMarketing wages and salaries 250,000 Selling expenses 50,000 300,000
Total overhead costs 1,850,000$
Overhead Costs at Classic Brass
(Manufacturing and NonManufacturing)
A&MIS 525 16
Activity-Based Costing at Classic Brass
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ShippingCosts
ShippingCosts Overhead CostsOverhead Costs
TracedTraced $/DLH$/DLH TracedTraced
Cost Objects:Products, Customer Orders, Customers
Cost Objects:Products, Customer Orders, Customers
A&MIS 525 17
Activity-Based Costing at Classic Brass
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ShippingCosts
ShippingCosts
OrderSize
OrderSize
CustomerOrders
CustomerOrders
ProductDesignProductDesign
CustomerRelationsCustomerRelations OtherOther
Overhead CostsOverhead Costs
Cost Objects:Products, Customer Orders, Customers
Cost Objects:Products, Customer Orders, Customers
First-Stage Allocation
A&MIS 525 18
Activity-Based Costing at Classic Brass
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ShippingCosts
ShippingCosts
Cost Objects:Products, Customer Orders, Customers
Cost Objects:Products, Customer Orders, Customers
OrderSize
OrderSize
CustomerOrders
CustomerOrders
ProductDesignProductDesign
CustomerRelationsCustomerRelations OtherOther
Overhead CostsOverhead Costs
First-Stage Allocation
Second-Stage Allocations
$/MH$/MH $/Order$/Order $/Design$/Design $/Customer$/Customer
UnallocatedUnallocated
A&MIS 525 19
Assigning Costs to Activity Cost Pools
Customer Orders
Product Design
Order Size
Customer Relations Other Total
Production DepartmentIndirect 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%
Shipping costs traced to customer order N/AGeneral 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 DepartmentMarketing wages and salaries 20% 10% 0% 60% 10% 100%Selling expenses 10% 0% 0% 70% 20% 100%
Activity Cost Pools
Management at Classic Brass believes overhead should be distributed as follows:
A&MIS 525 20
Customer Orders
Product Design
Order Size
Customer Relations Other Total
Production DepartmentIndirect factory wages 125,000$ Factory equipment depreciationFactory utilitiesFactory building lease
General Administrative DepartmentAdministrative wages and salariesOffice equipment depreciationAdministrative building lease
Marketing DepartmentMarketing wages and salariesSelling expenses
Total
Activity Cost Pools
Assigning Costs to Activity Cost Pools
Indirect factory wages $500,000Percent consumed by customer orders 25%
$125,000
Indirect factory wages $500,000Percent consumed by customer orders 25%
$125,000
Using the total costs and percentage consumption of overhead, costs are assigned to activity pools.
A&MIS 525 21
Customer Orders
Product Design
Order Size
Customer Relations Other Total
Production DepartmentIndirect factory wages 125,000$ Factory equipment depreciation 60,000 Factory utilitiesFactory building lease
General Administrative DepartmentAdministrative wages and salariesOffice equipment depreciationAdministrative building lease
Marketing DepartmentMarketing wages and salariesSelling expenses
Total
Activity Cost Pools
Assigning Costs to Activity Cost Pools
Factory equipment depreciation $300,000Percent consumed by customer orders 20%
$ 60,000
Factory equipment depreciation $300,000Percent consumed by customer orders 20%
$ 60,000
Using the total costs and percentage consumption of overhead, costs are assigned to activity pools.
A&MIS 525 22
Customer Orders
Product Design
Order Size
Customer Relations Other Total
Production DepartmentIndirect factory wages 125,000$ 200,000$ 100,000$ 50,000$ 25,000$ 500,000$ Factory equipment depreciation 60,000 - 180,000 - 60,000 300,000 Factory utilities - 12,000 60,000 - 48,000 120,000 Factory building lease - - - - 80,000 80,000
General Administrative DepartmentAdministrative wages and salaries 60,000 20,000 40,000 120,000 160,000 400,000 Office equipment depreciation 15,000 - - 12,500 22,500 50,000 Administrative building lease - - - - 60,000 60,000
Marketing DepartmentMarketing wages and salaries 50,000 25,000 - 150,000 25,000 250,000 Selling expenses 5,000 - - 35,000 10,000 50,000
Total 315,000$ 257,000$ 380,000$ 367,500$ 490,500$ 1,810,000$
Activity Cost Pools
Assigning Costs to Activity Cost Pools
Using the total costs and percentage consumption of overhead, costs are assigned to activity pools.
A&MIS 525 23
Computation of Activity Rates
The ABC team has determined that Classic Brass has the following total activities for
each activity cost pool . . .– 1,000 customer orders,– 200 new designs,– 20,000 machine-hours– 100 customers.
Now the team can compute the individual Now the team can compute the individual activity rates.activity rates.
A&MIS 525 24
1,000 Orders
200 Designs
20,000 machine-
hours 100
Customers Other
Production DepartmentIndirect factory wages 125$ Factory equipment depreciationFactory utilitiesFactory building lease
General Administrative DepartmentAdministrative wages and salariesOffice equipment depreciationAdministrative building lease
Marketing DepartmentMarketing wages and salariesSelling expenses
Total
Activity Cost Pools
Computation of Activity Rates
A&MIS 525 25
Computation of Activity Rates
1,000 Orders
200 Designs
20,000 machine-
hours 100
Customers Other
Production DepartmentIndirect factory wages 125$ 1,000$ 5$ 500$ N/AFactory equipment depreciation 60 - 9 - Factory utilities - 60 3 - Factory building lease - - - -
General Administrative DepartmentAdministrative wages and salaries 60 100 2 1,200 Office equipment depreciation 15 - - 125 Administrative building lease - - - -
Marketing DepartmentMarketing wages and salaries 50 125 - 1,500 Selling expenses 5 - - 350
Total 315$ 1,285$ 19$ 3,675$
Activity Cost Pools
A&MIS 525 26
Assigning Costs to Cost Objects
Let’s take a look at how our system works for just one customer - Windward Yachts.
– Windward ordered two products - Stanchions and customer compass housings. Here are the details:
Standard Stanchions (no design required)1. 400 units ordered with 2 separate orders.1. 400 units ordered with 2 separate orders.2. Each stanchion required 0.5 machine-hours .2. Each stanchion required 0.5 machine-hours .3. Selling price is $34 each.3. Selling price is $34 each.4. Direct materials total $2,110.4. Direct materials total $2,110.5. Direct labor totals $1,850.5. Direct labor totals $1,850.6. Shipping costs total $180.6. Shipping costs total $180.
Standard Stanchions (no design required)1. 400 units ordered with 2 separate orders.1. 400 units ordered with 2 separate orders.2. Each stanchion required 0.5 machine-hours .2. Each stanchion required 0.5 machine-hours .3. Selling price is $34 each.3. Selling price is $34 each.4. Direct materials total $2,110.4. Direct materials total $2,110.5. Direct labor totals $1,850.5. Direct labor totals $1,850.6. Shipping costs total $180.6. Shipping costs total $180.
A&MIS 525 27
Assigning Costs to Cost Objects
Let’s take a look at how our system works for just one customer - Windward Yachts.
– Windward ordered two products - Stanchions and customer compass housings. Here are the details:
Custom Compass Housing (requires new design)1. One order during the year.1. One order during the year.2. Each housing required 4 machine-hours .2. Each housing required 4 machine-hours .3. Selling price is $650 each.3. Selling price is $650 each.4. Direct materials total $13.4. Direct materials total $13.5. Direct labor totals $50.5. Direct labor totals $50.6. Shipping costs total $25.6. Shipping costs total $25.
Custom Compass Housing (requires new design)1. One order during the year.1. One order during the year.2. Each housing required 4 machine-hours .2. Each housing required 4 machine-hours .3. Selling price is $650 each.3. Selling price is $650 each.4. Direct materials total $13.4. Direct materials total $13.5. Direct labor totals $50.5. Direct labor totals $50.6. Shipping costs total $25.6. Shipping costs total $25.
A&MIS 525 28
2 Orders No new design
200 machine
hours N/A Total
Production DepartmentIndirect factory wages 250$ Factory equipment depreciationFactory utilitiesFactory building lease
General Administrative DepartmentAdministrative wages and salariesOffice equipment depreciationAdministrative building lease
Marketing DepartmentMarketing wages and salariesSelling expenses
Total
Activity Cost Pools
Assigning Costs to Cost Objects
$125 per order × 2 orders = $250$125 per order × 2 orders = $250
Overhead cost of two orders for standard stanchions.Overhead cost of two orders for standard stanchions.
A&MIS 525 29
Assigning Costs to Cost Objects
2 Orders No new design
200 machine
hours N/A Total
Production DepartmentIndirect factory wages 250$ -$ 1,000$ -$ 1,250$ Factory equipment depreciation 120 - 1,800 - 1,920 Factory utilities - - 600 - 600 Factory building lease - - - -
General Administrative DepartmentAdministrative wages and salaries 120 - 400 - 520 Office equipment depreciation 30 - - - 30 Administrative building lease - - - -
Marketing DepartmentMarketing wages and salaries 100 - - - 100 Selling expenses 10 - - - 10
Total 630$ -$ 3,800$ -$ 4,430$
Activity Cost Pools
Overhead cost of two orders for standard stanchions.Overhead cost of two orders for standard stanchions.
A&MIS 525 30
1 Order 1 new design
4 machine hours N/A Total
Production DepartmentIndirect factory wages 125$ Factory equipment depreciationFactory utilitiesFactory building lease
General Administrative DepartmentAdministrative wages and salariesOffice equipment depreciationAdministrative building lease
Marketing DepartmentMarketing wages and salariesSelling expenses
Total
Activity Cost Pools
Assigning Costs to Cost Objects
Overhead cost of one order for custom compass housing.Overhead cost of one order for custom compass housing.
$125 per order × 1 order = $125$125 per order × 1 order = $125
A&MIS 525 31
Assigning Costs to Cost Objects
1 Order 1 new design
4 machine hours N/A Total
Production DepartmentIndirect factory wages 125$ 1,000$ 20$ -$ 1,145$ Factory equipment depreciation 60 - 36 - 96 Factory utilities - 60 12 - 72 Factory building lease - - - -
General Administrative DepartmentAdministrative wages and salaries 60 100 8 - 168 Office equipment depreciation 15 - - - 15 Administrative building lease - - - -
Marketing DepartmentMarketing wages and salaries 50 125 - - 175 Selling expenses 5 - - - 5
Total 315$ 1,285$ 76$ -$ 1,676$
Activity Cost Pools
Overhead cost of one order for custom compass housing.Overhead cost of one order for custom compass housing.
A&MIS 525 32
Product MarginsStandard Stanchions
Sales 13,600$ Cost: Direct materials 2,110$ Direct labor 1,850 Shipping costs 180 Customer orders 630 Product design - Order size 3,800 8,570
Product margin 5,030$
Standard StanchionsSales 13,600$ Cost: Direct materials 2,110$ Direct labor 1,850 Shipping costs 180 Customer orders 630 Product design - Order size 3,800 8,570
Product margin 5,030$
Custom Compass HousingSales 650$ Cost: Direct materials 13$ Direct labor 50 Shipping costs 25 Customer orders 315 Product design 1,285 Order size 76 1,764
Product margin (1,114)$
Custom Compass HousingSales 650$ Cost: Direct materials 13$ Direct labor 50 Shipping costs 25 Customer orders 315 Product design 1,285 Order size 76 1,764
Product margin (1,114)$
A&MIS 525 33
Custom Compass HousingSales 650$ Cost: Direct materials 13$ Direct labor 50 Shipping costs 25 Customer orders 315 Product design 1,285 Order size 76 1,764
Product margin (1,114)$
Custom Compass HousingSales 650$ Cost: Direct materials 13$ Direct labor 50 Shipping costs 25 Customer orders 315 Product design 1,285 Order size 76 1,764
Product margin (1,114)$
Product MarginsStandard Stanchions
Sales 13,600$ Cost: Direct materials 2,110$ Direct labor 1,850 Shipping costs 180 Customer orders 630 Product design - Order size 3,800 8,570
Product margin 5,030$
Standard StanchionsSales 13,600$ Cost: Direct materials 2,110$ Direct labor 1,850 Shipping costs 180 Customer orders 630 Product design - Order size 3,800 8,570
Product margin 5,030$
Windward YachtsProduct margins: Standard stanchion 5,030$ Custom compass housing (1,114) Total product margin 3,916 Less: Customer relations 3,675 Customer margin 241$
Windward YachtsProduct margins: Standard stanchion 5,030$ Custom compass housing (1,114) Total product margin 3,916 Less: Customer relations 3,675 Customer margin 241$
A&MIS 525 34
Product Margins
Standard Stanchions
Compass Housing
Sales 13,600$ 650$ Costs
Direct materials (2,110) (13) Direct labor (1,850) (50) Manufacturing overhead (10,000) (200)
Product margin (360)$ 387$
Traditional Cost Accounting System
Predetermined manufacturingoverhead rate
$1,000,000 20,000 MH
= $50/MH=
A&MIS 525 35
Product Margins
Standard Stanchions
Compass Housing
Sales 13,600$ 650$ Costs
Direct materials (2,110) (13) Direct labor (1,850) (50) Manufacturing overhead (10,000) (200)
Product margin (360)$ 387$
Traditional Cost Accounting System
400 units x 0.5 MH/unit x $50/MH = $10,000400 units x 0.5 MH/unit x $50/MH = $10,000
A&MIS 525 36
Difference Between ABC and Traditional Product Costs
ABC will ordinarily shift batch-level and product-level
overhead costs from high-volume
products produced in large batches to
low-volume products produced in small
batches.
A&MIS 525 37
Difference Between ABC and Traditional Product Costs
Under ABC both manufacturing and
nonmanufacturing costs may be assigned to
products. Organization-sustaining costs and the
costs of idle capacity are not assigned to
products.
A&MIS 525 38
Ease of Adjustment
Costs that adjust automatically to changes in activity:– Direct materials.– Shipping.
Costs that could be adjusted to changes in activity:– Direct labor.– Factory utilities.– Administrative wages and salaries.– Office equipment depreciation.– Marketing wages and salaries.– Selling expenses.
Costs that are difficult to adjust to changes in activity:– Factory equipment depreciation.– Factory building lease.– Administrative building lease.
A&MIS 525 40
Simplified Approach to ABC
After the first-stage allocation is complete, computation of activity rates for each activity cost pool can be simplified
as follows:
Computation of the Activity Rates Customer
Orders Product Design Order Size
Customer Relations Other
Costs from first- stage allocation 315,000$ 257,000$ 380,000$ 367,500$ 490,500$ Total activity 1,000 200 20,000 100 N/ACost per unit of activity 315$ 1,285$ 19$ 3,675$
Computation of the Activity Rates Customer
Orders Product Design Order Size
Customer Relations Other
Costs from first- stage allocation 315,000$ 257,000$ 380,000$ 367,500$ 490,500$ Total activity 1,000 200 20,000 100 N/ACost per unit of activity 315$ 1,285$ 19$ 3,675$
÷ ÷ ÷ ÷
A&MIS 525 41
Simplified Approach to ABC
Standard Stanchions: Sales 13,600$ Costs: Direct materials 2,110$ Direct labor 1,850 Shipping costs 180 Customer orders (2) 630 Product design - Order size (200) 3,800 8,570 Product margin 5,030$
2 orders @ $315 per order2 orders @ $315 per order
A&MIS 525 42
Simplified Approach to ABC
Custom Compass Housing Sales 650$ Costs: Direct materials 13$ Direct labor 50 Shipping costs 25 Customer orders (1) 315 Product design 1,285 Order size 76 1,764 Product margin (1,114)$
1 design @ $1,285 per design1 design @ $1,285 per design
A&MIS 525 43
Simplified Approach to ABC
Customer margin for Windward Yachts is shown below:Customer Profitability AnalysisProduct margins: Standard stanchion $ 5,030 Custom compass housing (1,114) Total product margins 3,916 Less: Customer relations (3,675) Customer margin 241
A&MIS 525 45
Puzzle
A shipping company had trouble determining how much it should cost to ship materials from Ohio to a point near the Atlantic ocean. In spite of numerous trips within the Great Lakes area, the company still found it difficult to predict costs. What do you suppose was making cost estimation difficult?
A&MIS 525 46
Agenda Today
• Clarify our views of the activity paradigm
• Discuss efficiency & effectiveness
• Summarize the basics about the relationship of standards to the costs incurred
• Review some problems
A&MIS 525 48
Activities
• Activities are about actions, doing something, effort, work done, not the consequences of the work or effort.
• Metrics or measures are the ways we are going to quantify the volume of activity during a time period. Different activities require different metrics.
A&MIS 525 49
Activity Terminology
• Statistics represent the numeric values assigned to the metrics for a period.
• Data sources are the primary or secondary sources of the statistics.
A&MIS 525 50
Thinking About Activities
Inputs Activities Outputs
1. Labor Assembling Products
2. Materials Processing Intermediate
products
3. Parts Assembling Assembly
4. Equipment Stamping Steel part
5. Services Insurance Risk reduction 6. Warehouse Storing Availability
A&MIS 525 51
An Observation
• Defining activities can be difficult, particularly in service and creative work.
• Even when we can define an activity, it can be difficult to separate measures of activity level from measures of output. It is simpler to focus on outputs, which is what the text tends to do in places.
• But properly defining activities is crucial
A&MIS 525 52
Related Terminology
• What does it mean to be efficient?
• What does it mean to be effective?
A&MIS 525 53
Efficiency
• Measures of efficiency nearly always compare the inputs to an activity or process with its outputs. The greater the output per unit of input, the more efficient. The fewer the units of input required to make one unit of output, the greater the efficiency.
• Efficiency is a general concept that relates to entities ranging from individuals performing a single task to entire economies.
A&MIS 525 54
Efficiency
• Since the productivity of labor has been so key to the wealth of a society, we continue to focus on the productivity of people. Sales per person, gross margin per person, and physical output per person, are measures of efficiency as well as measures of productivity.
• Cost per sales dollar, or cost per unit of output are the most common measures of efficiency used in managerial accounting.
A&MIS 525 55
Efficiency in Accounting
• In accounting we use cost standards, flexible budgets and profitability measures to evaluate efficiency. These standards relate the work done to the cost incurred to achieve that work. Physical measures are useful, but the ultimate measures include profitability.
• We may measure other operating variables because we believe they relate to profitability in the longer run.
A&MIS 525 59
Effectiveness
• Effectiveness is concerned with the achievement of objectives. Making a sales goal, achieving a target market share, completing a project on schedule, satisfying customers, and retaining employees--which may or may not change productivity. So effectiveness is a separate issue:
Did we achieve the goal?
A&MIS 525 60
Effectiveness Measures
• Percent of the goal achieved.
• Percent variance from goal.
• Improvement from past experience
• Percent of the goal achieved compared with last period.
• Percent variance from goal compared with last period.
• Examples from your experience?
A&MIS 525 61
Effectiveness Measures
• Headcount, cycle time, customer satisfaction, and other measures are believed to lead to greater profitability. But they are not measures of efficiency per se.
A&MIS 525 62
Operational (Technical) Control
Provides feedback to employees and their managers about the efficiency of activities being performed. Measures of effectiveness might include cycle times, spoilage rates, lost units, late shipments, etc.
A&MIS 525 64
Standard Costing
• A management system that makes sense in a technical planning and control context
• Concerned with economic efficiency, not effectiveness beyond this one isssue.
A&MIS 525 65
Roots
• Originated as part of the scientific management movement of the early to mid 20th century.
• Represents a move away from arbitrary management methods to those based on observable “scientific” information. This movement followed the successes of medicine and agriculture earlier in the 20th century.
A&MIS 525 66
Substance
• Standards represent the output that should be achieved at a specified level of perfection based on the operating capacities of people, equipment, management, process design, etc.
A&MIS 525 67
Relationship Overview
Standard cost
+ Unfavorable variances
- Favorable variances
= (Actual) cost incurred (GAAP)
A&MIS 525 68
Relationship Overview (dr/cr)
Standard cost (dr)
+ Unfavorable variances (dr)
- Favorable variances (cr)
= (Actual) cost incurred (dr)
A&MIS 525 69
Formulae
• Output achieved x unit standard = total input at standard
• Materials, labor and driver activity:
AQO (output) x sq (unit standard) = SQ (total material, labor or driver activity “allowed” at standard)
• Standard cost per unit = Σ(sq x sp)
A&MIS 525 70
Formulae
• Standard cost of production =
AQO x Σ(sq x sp)
• When the price variance is isolated and recorded at usage,
aq•ap = sp•sq + (ap–sp)aq + (aq-sq)sp
aq•ap = sp•sq + ap•aq – sp•aq + aq•sp -sq•sp
A&MIS 525 71
• Nothing in the world can take the place of PERSISTENCE.
• Talent will not; nothing is more common than unsuccessful men with talent.
• Genius will not; unrewarded it's almost a proverb.• Education will not; the world is filled with educated
derelicts.• PERSISTENCE and DETERMINATION alone are
omnipotent.
_Calvin Coolidge
Today’s Quote