Upload
jeffery-spencer
View
234
Download
4
Embed Size (px)
Citation preview
25 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing
and Other CostManagement ToolsChapter
25
25 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
David, Matt, and Marc:Total expenses = $900
Cost allocated = $300 per person
Rent and Utilities $570Cable TV 50High speed Internet access 40Groceries 240Total $900
Refining Cost Systems
25 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Refining Cost Systems
More Refined Allocation
David Matt Marc TotalRent and Utilities $190 $190 $190 $570Cable TV 25 – 25 50Internet access – 40 – 40Groceries – 80 160 240Total costs allocated $215 $310 $375 $900Original cost allocation 300 300 300 900Difference $(85) $ 10 $ 75 $ 0
25 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sharpening the Focus: From Business Functions to Activities
PANEL A—Companywide Business Functions in the Value ChainR&DDesignProductionMarketingDistributionCustomer Service
PANEL B—Production Departments/Product LinesServersNotebook ComputersDesktop Computers
Inventoriable costs for financial reporting
Inventoriable costs for financial reporting
25 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sharpening the Focus: From Business Functions to Activities
PANEL C—Activities for Desktop Product Line1. Kitting—preparing all items for assembly2. Motherboard preparation—snapping in
CPU and memory modules3. Assembly into chassis4. Software downloading5. Testing6. Boxing
Inventoriablecosts forfinancialreporting
25 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Describe and developactivity-based costs
(ABC).
Objective 1
25 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Example of Activities and Cost Drivers:
Activities:Material purchasingMaterial handlingProduction schedulingQuality inspectionsPhotocopyingWarranty service
Cost Drivers:No. of purchase ordersNo. of partsNo. of batchesNo. of inspectionsNo. of pages copiedNo. of service calls
Activity-Based Costing
25 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Activity-BasedCosting Systems
Chemtech produces large quantities of “commodity” chemicals.
It also manufactures small quantities of specialty chemicals.
In the past, Chemtech’s manufacturing department has used direct labor hours as its single allocation base at a 200% rate.
25 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Activity-BasedCosting Systems
Among its many products, the department produces Aldehyde (a commodity chemical used by producing plastics) and...
Phenylephrine Hydrochloride (PH), which is a specialty chemical.
A single customer uses PH in manufacturing blood-pressure medications.
25 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Activity-BasedCosting Systems
Chemical Manufacturing Department Overhead
DirectLaborCost
ChemicalA
ChemicalB
ChemicalC
DepartmentalIndirect CostPool
CostAllocationBase
ProductCostObjects
25 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Activity-BasedCosting Systems
Chemical Manufacturing Department Overhead
No. ofMachine
Hours
ChemicalA
ChemicalB
ChemicalC
DepartmentalIndirect CostPool
CostAllocationBase
ProductCostObjects
No. ofSamplesTaken
No. ofBatches
ProcessingMixing TestingActivityIndirect CostPool
25 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Chemtech Traditional Cost System Aldehyde PH
Sale price per pound $10 $70Less: manufacturingcost per poundDirect materials 5 20Direct labor 1 10Manufacturing overhead 2 20Gross profit per pound $ 2 $20
Traditional versus Activity-BasedCosting Systems
25 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Activity-BasedCosting Systems
Assume that the company produced 7,000 pounds of Aldehyde and 5 pounds of PH.
What is the total labor cost per product? 7,000 pounds × $1 = $7,000 (Aldehyde) 5 pounds × $10 = $50 (PH) What is the total manufacturing overhead
allocated to each product?
25 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Chemtech assigns 140 times as much overhead to Aldehyde as to PH.
Chemtech assigns 140 times as much overhead to Aldehyde as to PH.
Traditional versus Activity-Based
Costing Systems $7,000 × 200% = $14,000 to Aldehyde $50 × 200% = $100 to PH
25 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing System
Identify activities.
MixingProcessing
Testing
Estimate the total indirectcosts of each activity.
Labor $150,000Depreciation 200,000Other 250,000Total $600,000
Step 1 Step 2
25 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing System
Identify the primary cost driver foreach activity’s indirect costs.
(1) (2) (3)Activity Estimated Costs Cost DriverMixing $600,000 # of batchesProcessing $300,000 # of hours (MH)Testing $600,000 # samples
Step 3
25 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing System
Estimate the total quantity of each allocation base.
(1) (4)Activity Estimated Quantity of Cost DriverMixing 4,000 batchesProcessing 5,000 machine hours (MH)Testing 3,000 samples
Step 4
25 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing System
Compute the allocation rate for each activity.
(1) (5)Activity Cost Allocation RateMixing $600,000 ÷ 4,000 = $150/batchProcessing $300,000 ÷ 5,000 = $60/MHTesting $600,000 ÷ 3,000 = $200/sample
Step 5
25 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing System
Obtain the actual quantity of each allocation base used by each product.
During the year, Chemtech produced60 batches of Aldehyde and 1 batch of PH.
The remaining batches consistof Chemtech’s other chemicals.
Step 6
25 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing System
Allocate the costs to each product.
Mixing Cost Allocation:Aldehyde: 60 batches × $150 per batch = $9,000
PH: 1 batch × $150 per batch = $150
Step 7
25 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Activity-Based Costing System
The ABC system allocates 29 times asmuch overhead to Aldehyde as to PH.
Activity Cost Driver Units Cost Allocated to: Used By: Aldehyde PH Aldehyde PH
Mixing 60 batches 1 batch $ 9,000 $150Processing 30½ MH 2 MH 1,830* 120Testing 14 samples 1 sample 2,800 200Total $13,630 $470*30½ MH × $60 per MH = $1,830
25 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cost/pound Traditional ABC(Overhead) System SystemAldehyde $ 2.00 $ 1.95PH $20.00 $94.00
Activity-Based Costing System
What is the overhead cost per pound? Aldehyde: $13,630 ÷ 7,000 = $1.95 PH: $470 ÷ 5 = $94
25 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Aldehyde PH Sale price per pound $10.00 $ 70.00Less: manufacturing
cost per poundDirect materials 5.00 20.00Direct labor 1.00 10.00Manufacturing overhead 1.95 94.00 Gross profit per pound $ 2.05 $(54.00)
Activity-Based Costing System
Chemtech Gross Profit per Pound
25 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Use ABC data and activity-based
management (ABM) to makebusiness decisions.
Objective 2
25 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Pricing and Product Mix Decisions
Aldehyde PH Sale price per pound $10.00 $70.00Less: manufacturing
cost per pound 8.00 50.00Gross profit per pound $ 2.00 $20.00
Original Cost System
25 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Pricing and Product Mix Decisions
Aldehyde PH Sale price per pound $10.00 $70.00Less: manufacturing
cost per pound 7.95 124.00Gross profit per pound $ 2.05 $(54.00)
Activity-Based Cost System
25 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Pricing and Product Mix Decisions
Chemtech has three alternatives:1 Cut the cost of PH.2 Increase the sale price of PH.3 Drop the PH product.
25 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Use ABM and valueengineering to achievetarget costs for target
pricing.
Objective 3
25 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cost Reduction Decisions
Value engineering means systematically evaluating activities in an effort to reduce costs while satisfying customer needs.
25 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Target PricingTarget sale price (based on market research)
– Desired profit = Target cost
Traditional Cost-Based PricingFull product cost (from entire value chain)
– Desired profit = Sale price
Target Pricing versus Traditional Cost-Based Pricing
25 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Target Pricing versus Traditional Cost-Based Pricing
Assume that the market price of aldehyde is likely to fall to $9.50 per pound.
The desired target profit is 20% of the sale price.
What is the target cost? $9.50 – $1.90 = $7.60
25 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Target Pricing versus Traditional Cost-Based Pricing
Current CostsManufacturing $7.95 per pound
Nonmanufacturing costs = $0.50 per pound
$7.60 – $8.45 = $(0.85)
Current costs must be reduced by $0.85 per pound.
25 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Decide when ABC is most likely
to pass the cost-benefit test.
Objective 4
25 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Cost-Benefit Test
ABC’s benefits are higher when...– the company produces many different
products that use different amounts of resources.
– the company has high overhead costs.– the company produces high volumes of some
products, and low volumes of other products.
25 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Cost-Benefit Test
The costs of adopting ABC are lower when the company has...
– accounting and information system expertise to develop the system.
– information technology (bar coding, optical scanning) to record cost driver data.
25 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Managers don’t understand costs and profits.
The cost system is outdated.
Signs That the Cost SystemMay Be Broken
25 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compare a traditional production
system to a just-in-time(JIT) production system.
Objective 5
25 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Just-in-Time Production Systems
Traditional versus Just-in-Time Production Systems
Why do traditional businesseskeep large inventories?
To protect against poor quality
Long setup times
Uncertainty
25 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Just-in-Time Production Systems
Building A
CuttingDepartment work in
process
ShapingDepartment work in
process
GrindingDepartment work in
process
SmoothingDepartment
finishedproduct
25 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Just-in-Time Production Systems
Building A
cuttingmachine
shapingmachine
smoothingmachine
finishedproduct
grindingmachine
25 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Traditional versus Just-in-Time Production Systems
Traditional versus Just-in-Time Production Systems
Traditional Production Systems:Machines are arranged by functions.Production workers operate a single machine.Large batches are produced.There are many suppliers .
Just-in-Time Production Systems:Machines are arranged in operational sequence.Machine setup times are short.Workers are cross-trained and perform many tasks.Small batches are produced.There are fewer suppliers who are well coordinated.
25 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Just-in-Time Production Systems
Companies that follow JIT have several common characteristics:
– sequential arrangement of production activities
– reduction of setup times– cross-training of employees– scheduling production as needed by use of a
“demand pull” system
25 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Record manufacturing
costs for a just-in-timecosting system.
Objective 6
25 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Just-in-Time Costing...Just-in-Time Costing...
– is sometimes called “backflush costing.” It is a standard costing system that begins
with output completed and then assigns manufacturing cost to units sold and to inventories.
JIT Cost
25 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Just-in-Time Costing Example
Big Bear Company converts silicon water into integrated circuits used for various purposes.
Big Bear uses only two inventory accounts:1 Raw and In Process (RIP) Inventory (which
is a combination of direct materials and work in process)
2 Finished Goods Inventory
25 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Just-in-Time Costing Example
Big Bear had the following inventory values on June 30:
– Raw and in process: $100,000– Finished goods: $800,000 During July, the following took place: Direct materials of $3,030,000 were purchased. $18,200,000 of actual conversion costs were
incurred.
25 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Just-in-Time Costing Example
The company produced 3,000,000 units. The standard cost per unit was $7.00 ($1.00
for direct materials and $6.00 for conversion costs).
The company sold 2,950,000 units. What are the journal entries?
25 - 48©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Just-in-Time Costing ExampleJust-in-Time Costing Example
Raw and In Process Inventory 3,030,000Accounts Payable 3,030,000
To record purchases of raw materials
Conversion Costs 18,200,000Various Accounts 18,200,000
To record various conversion costs
25 - 49©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Finished Goods Inventory 21,000,000RIP Inventory 3,000,000Conversion Costs 18,000,000
Completed units
Cost of Goods Sold 20,650,000Finished Goods Inventory 20,650,000
To record 2,950,000 units sold
Just-in-Time Costing Example
25 - 50©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Just-in-Time Costing Example
RIP Inventory Conversion Costs
Finished Goods Inventory Cost of Goods Sold
Bal. 100,000 3,030,000 3,000,000
Bal. 130,000
18,200,000 18,000,000
Bal. 800,00021,000,000 20,650,000
Bal. 1,150,000
20,650,000
25 - 51©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contrast the four types ofquality costs and use
thesecosts to make decisions.
Objective 7
25 - 52©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Total Quality Management
The goal of total quality management (TQM) is to provide customers with superior products and services.
Total quality management (TQM) describes the entire effort of improving quality throughout the organization’s value chain.
25 - 53©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Types of Quality Costs
Prevention costs are incurred to avoid inferior quality goods or services.
Training personnelEvaluating potential suppliers
Improved materialsPreventive maintenance
Improved equipment and processes
25 - 54©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Types of Quality Costs
Appraisal costs are incurred todetect inferior quality goods or services.
Inspection of incoming materialsInspection at various stages of production
Inspection of final products or servicesProduct testing
25 - 55©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Types of Quality Costs
Internal failure costs are incurred when the company detects and corrects inferior quality
goods or services before delivery to customers.
Production loss caused by downtimeReworkScrap
Rejected product unitsDisposal of rejected units
25 - 56©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Types of Quality Costs
External failure costs are incurred wheninferior quality goods or services are notdetected until after delivery to customers.
Profit losses from lost customersWarranty costs
Service costs at customer sitesSales returns due to quality problems
Product liability claims