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These course slides provide a helpful introduction to ABC and ABM accounting.
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MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
1 1
WORKING PAPERS
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
2
“Cost Accounting : a managerial emphasis – Horngren et all (14th ed.), Chapter 5
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
3
METHODS FOR DETERMINING VALUE
• Δ Size/Complexity
• Δ Pressure for data processing
• Δ Allocation Basis
• Δ Cost centres
Paradox: The More... The Less...
A B C
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
4
Product Cost-Cross Subsidization CASE
Central Bakery
Bread Birthday Cake
• Flour
• Direct Labour (5h/100 Kg)
• Flour
• Eggs
• Milk
• Sugar
• Direct Labour (0,5h/100 Kg)
DIRECT COST
• Salt
• Ferment
• Water
• Energy
• Depreciation
INDIRECT COSTS • Chocolate
• Crumbled almonds
• Cream
• Dry fruits
• Water
• Energy
• Depreciation
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
5
Product Cost-Cross Subsidization CASE
Data:
• Direct Costs of “Bread”: €4/100 Kg
• Direct Costs of “Birthday Cake”: €7/100 Kg
• Indirect Costs: €200.000/month (A)
• Indirect Costs Allocation Basis: Direct Labour hours
• Direct Labour hours/month: 200.000h (B)
• Allocation Rate: €1/h [(A) : (B)]
CENTRAL BAKERY
Bread Birthday Cake
Direct Costs: € 4
Indirect Costs: € 5
Total: € 9
Price: € 10
Margin: € 1
Direct Costs: € 7
Indirect Costs: € 0,5
Total: € 7,5
Price: € 20
Margin: € 12,5
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
6
A-B C / A-B M [ Activity-Based Costing / Activity-Based
Management]
Definition
Alternative methodology to allocate indirect costs to product/services regarding their more accurate evaluation
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
7
THE “LIES” ABOUT A-B C
1. That is the costing system to services
2. That is the process to calculate exact costs
3. That is the ‘magic potion’ to solve all the problems of management control
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
8
A-B C [Activity-Based Costing]
“ ACTIVITIES CONSUME RESOURCES;
PRODUCTS CONSUME ACTIVITIES”
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
9
A-B C [Activity-Based Costing]
• CONCEPTUAL REFORMULATION
• Activity
• Cost-Driver
• APPLICATION REVOLUTION
• Unit Cost of the activity/activities
• Fixed Costs viewed from a resource standpoint vs. Variable Costs viewed
from an activity standpoint
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
10
A-B C [Activity-Based Costing]
San
sam SPi
SPj SPk
X
Activity
“Treatment of Surfaces”
Legend:
SPi – Painting
SPj – Hot House
SPk – Polishing
sam – Warehouse
sau - Cleaning & Maintenance
X - Overheads
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
11
A-B C [Activity-Based Costing]
Operational Advantages
• Unnecessary to divide indirect costs among the 5 sections
• Unnecessary to transfer accumulated costs into 2 auxiliary sections
• Potential availability of information to calculate the unit cost of the activity ‘Treatment of Surfaces’
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
12
A-B C / A-B M [Activity-Based Costing / Activity-Based
Management]
Demonstration Case
Quantity Direct Materials Direct Labour
Lamps 60.000 €1.125.000 €600.000 (30.000h)
Candelabrums 15.000 €675.000 €195.000 (9.750h)
ILUMINEX, S.A.
Lamps & Candelabrums
Part A
Present Situation
1. Direct Costs
2. Indirect Costs
Total Indirect Costs ......................... € 2.385.000
Allocation Basis ............................... Direct Labour hours
Total Direct Labour hours ................. 39.750h
Allocation Rate ................................ 60/h
3. Prices
Lamps ............................................ €63/unit
Candelabrums ................................ €137/unit
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
13
Calculations
ITEM
Lamps Candelabrums
TOTAL
Total Value Unit Value Total Value Unit Value
Direct Materials 1.125.000 18,75 675.000 45,00 1.800.000
Direct Labour 600.000 10,00 195.000 13,00 795.000
Total Direct Costs 1.725.000 28,75 870.000 58,00 2.595.000
Allocated Indirect Costs 1.800.000 30,00 585.000 39,00 2.385.000
Total Costs 3.525.000 58,75 1.455.000 97,00 4.980.000
Sales 3.780.000 63,00 2.055.000 137,00 5.835.000
Operational Profit 255.000 4,25 600.000 40,00 855.000
6,75% 29,20% 14,65
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
14
Part B
Implementing A-B C
1. Cost Objectives
(L)amps; (C)andelabrums
2. Direct Costs
Costs with “Cleaning & Maintenance” – 270.000€ - can be “up-graded” to Direct Costs because of their close relation with the number of batches produced (Lamps = 240; Candelabrums = 300)
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
15
ITEM
Lamps Candelabrums
TOTAL
Total Value Unit Value Total Value Unit Value
Direct Materials 1.125.000 18,75 675.000 45,00 1.800.000
Direct Labour 600.000 10,00 195.000 13,00 795.000
Cleaning & Maintenance 120.000 2,00 150.000 10,00 270.000
Total Direct Costs 1.845.000 30,75 1.020.000 68,00 2.865.000
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
16
3./4./5. Cost-Pools and Cost-Drivers
Activity Basis Total Costs Level Cost-Driver
Design m2 450.000 100 m2 4.500/m2
Setup Setup hours 300.000 2.000 hours 150/Setup hour
Operations Machine – hours 637.500 12.750 hours 50/Machine hour
Delivery Nr. Loadings 81.000 200 loadings 405/Loading
Distribution m3 391.500 67.500 m3 5,80/m3
Supervision Direct Labour
hours 255.000 39.750 hours
6,4151/Direct Labour hour
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
17
6./7. Costs and Margins
ITEM
Lamps Candelabrums TOTAL
Total Value Unit Value Total Value Unit Value
TOTAL DIRECT COSTS (A) 1.845.000 30,75 1.020.000 68,00 28.650.000
INDIRECT COSTS
• DESIGN
Lamps 30 m2*4.500/m2
Candelabrums 70 m2*4.500/m2
135.000
2,25
315.000
21,00
450.000
• SETUP
Lamps 500h*150/h
Candelabrums 1.500h*150h
75.000
1,25
225.000
15,00
300.000
• OPERATIONS
Lamps 9.000 m h*50/m h
Candelabrums 3.750 m h*50/m h
450.000
7,50
187.500
12,5
637.500
• DESPATCH
Lamps 100 load.*405/load.
Candelabrums 100 load.*405/load.
40.500
0,67
40.500
2,70
81.000
• DISTRIBUTION
Lamps 45.000 m3*5,80/m3
Candelabrums 22.500 m3*5,80/m3
261.000
4,35
130.500
8,70
391.500
• SUPERVISION
Lamps 30.000 men-hours*6,4151/h
Candelabrums 9.750 men-hours*6,4151/h
192.453
3,21
62.547
4,17
255.000
TOTAL INDIRECT COSTS (B) 1.153.953 19,23 961.047 64,07 2.115.000
TOTAL [(A)+(B)] 2.998.953 49,98 1.981.047 132,07 4.980.000
SALES 3.780.000 63,00 2.055.000 137,00 5.835.000
OPERATIONAL PROFIT 781.047 13,02 73.953 4,93 855.000
20,67% 3,60% 14,65%
MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Management Control Systems
2012
Paulo Modesto Pardal
18
Comparative Analysis
High-powered information Traditional Costing Methods Cost = (Dir. Mat.; Dir. Lab.; Overheads) where, usually, Overheads = (Direct Costs)
Activity-based Costing Cost = (Dir. Mat.; Dir. Lab.; Overheads) with
Overheads = (Activ. 1; Activ. 2; ...; Activ. N)
A new cost objective: the Activity As a consequence, increased information: the cost-drivers as unit costs of the Activities Planning & Controlling the cost-drivers: A-B B (Activity-Based Budgeting) and A-B M (Activity-Based Management)
A-B C / A-B M [Activity-Based Costing / Activity-Based
Management]