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C H A P T E R 8
Management AccountingInformation In the New Business Environment
Management AccountingInformation In the New Business Environment
Explain the fundamentals of activity-based costing (ABC) and activity-based management (ABM).
Learning Objective 1
Activity-Based Costing (ABC)
A method of attributing costs to products based on:
Costs Activities Products
• assigning costs of resources to activities
• assigning costs of activities to products
Unit-Based Costing (UBC)
The traditional method of allocating costs (manufacturing overhead) to products based on number of units produced. If only three products are produced (one of each), then:
Costs Production Departments
Products
$9,000 Overhead
$3,000
Overhead per product
=
Relationship BetweenUBC and ABC
Unit-Based Costing (UBC)
Model of Costs
Activity-Based Costing (ABC) Hierarchical
Product Cost Model
Costs ofDirect Materials
Costs ofDirect Labor
Variable ManufacturingOverhead Costs
Costs ofUnit-Level Activities
Fixed ManufacturingOverhead Costs
Costs ofBatch-Level Activities
Costs ofProduct Line Activities
Costs of Facility Support Activities
What is the hierarchical product cost model?
ABC—Allocating Resource Costs to Activities
ABC—Allocating Resource Costs to Activities
Facility Support Activities
Product Line Activities
• Unit-Level Activities• Take place each time a unit is produced
• Packing
• Assembly
• Direct Materials, Direct Labor
• Variable Manufacturing Overhead
Batch-Level Activities
Unit-Level Activities
ABC—Allocating Resource Costs to Activities
Facility Support Activities
• Batch-Level Activities
• Number of setups
• Setup hours
• Movements of materials
• Orders for non-stocked items
• Inspections
Product Line Activities
Batch-Level Activities
Unit-Level Activities
ABC—Allocating Resource Costs to Activities
• Product Line Activities• Engineering and design changes
• Warehousing of product line materials
• Production line dedicated supervisors
• Purchasing
• Receiving and shipping
Facility Support Activities
• Facility Support Activities• Property taxes
• Plant security
• Landscaping
• Accounting and legal
• General administrative salaries
Product Line Activities
Batch-Level Activities
Unit-Level Activities
ABC—Allocating Resource Costs to Activities
Does a hammer really cost THAT MUCH?
If a UBC factory produces only three products (a hammer, a clock, and a Ferrari) and a hammer incurs $4 of direct labor and materials, how much will the hammer cost if manufacturing overhead is allocated evenly over finished products?
Cross-Subsidization
$9,000
Overhead
?
Overhead per
product=
Does a hammer really cost THAT MUCH?
Cross-Subsidization
$9,000
Overhead
$3,000
Overhead per
product3 Products
$3,004 !?1 Hammer =
=
Does a hammer really cost THAT MUCH?
Cross-Subsidization
$9,000 Overhead ?
Overhead per product
Under UBC (unit-based costing), some products may be inappropriately assigned costs that actually belong to another product line (in this case, the hammer and clock are obviously cross-subsidizing the Ferrari product line).
=
Product Cost Distortions
What are the Hazards of Allocating Costs?
$8 $20 $100,0002 10 70,000
2 5 25,000
$4 $ 5 $ 5,000
RevenueMaterialsLabor
Profit
Hazards of Allocating Costs
Product profitability before overhead allocation:
Hammer Clock Ferrari
Hazards of Allocating Costs
Product profitability after
overhead allocation:
RevenueMaterialsLaborOverhead
Profit
$ 8 $ 20 $100,0002 10 70,0002 5 20,000
3,000 3,000 3,000
$(2,996) $(2,995) $ 7,000
Hammer Clock Ferrari
In actuality, most of the $9,000 manufacturing overhead is attributable to the Ferrari, revealing it to
be the real money loser.
In actuality, most of the $9,000 manufacturing overhead is attributable to the Ferrari, revealing it to be the real money loser,
BUT because the other products are cross-subsidizing, they appear unprofitable and will be discontinued from production.
$ 8 $ 20 $100,0002 10 70,0002 5 25,000
3,000 3,000 3,000
$(2,996) $(2,995) $ 2,000
RevenueMaterialsLaborOverhead
Profit
Hazards of Allocating Costs
Hammer Clock Ferrari
Hammer Clock Ferrari
$100,000 70,000 25,000 8,990
$ (3,990)
RevenueMaterialsLaborOverhead
Profit
Hazards of Allocating Costs
The result?
Costs Activities Products
Activity-Based Management (ABM)
Managing costs, quality, and timeliness of activities through the identification and use of Cost Drivers and Performance Measures.
Cost Drivers
Performance Measures
Describe total quality management (TQM) and costs of quality (COQ).
Learning Objective 2
What is Total QualityManagement (TQM)?
TQMTQM
The Old Way
The Secret to Success?
Andrew
Carnegie
The New Way
W. Edward Deming
Total QualityManagement (TQM)
“Watch the Qualityand the profits will
take care ofthemselves.”
“Watch the costs and the profits will
take care ofthemselves.”
Define SPC—Statistical Process Control
Total Quality Management (TQM)
$What are the Four
Costs of Quality (COQ)?
Prevention Costs:
Appraisal Costs:
Internal Failure Costs:
External Failure Costs:
Define Each Cost of Quality (COQ)
What is the Effect of Increasing Prevention and Appraisal Costs of
Quality (COQ)?
Learning Objective 3
Compute the opportunity cost of lost sales.
What is robust quality?
Define Taguchi’s loss function and give the formula
Done Chapter 8 Managerial Accounting
