Chapter 5 Activity-Based Cost Management Systems

Chapter 5 – Activity-Based Cost Management Systems

and

Chapter 6 – Management Accounting Information for Activity and Process Decisions

Chapter 5- Activity Based Cost Management Systems

I.  Traditional Manufacturing Costing Systems - (simple job and process costing systems in Chapter 4)

·  Assign direct labor and direct materials costs to products

·  Indirect costs are allocated to production departments then to products

1. Cooper Pens – Exhibit 5-1 (what are the problems?)
2. Production Departments
3. Service Departments

II.  Activity-Based Cost Management Systems

·  Tracing costs to activities then to products

1. Unit-level
2. Batch-level
3. Product-sustaining
4. Customer-sustaining
5. Facility-sustaining
6. Operational Activity-Based Management
7. Activity cost drivers
8. Activity cost driver rate
9. Step 1 – What activities performed by the organization?
10. Step 2 – What are costs to perform each activity?
11. Step 3 – Identify the cost driver for each activity
12. Step 4 – Determine the total number of units of the cost driver
13. Step 5 – Divide the activity cost by the activity driver units to get the activity cost driver rate
14. Bill of activities
15. Activity-based management
16. Selecting activity cost drivers
17. Transaction drivers
18. Duration drivers
19. Intensity drivers

III.  Measuring Cost of Resource Capacity

1. Theoretical Capacity “ideal”
2. Practical Capacity
3. Cost of unused capacity
4. Fixed and variable costs in ABC systems

IV.  Marketing, Selling and Distribution Expenses

·  Tracing Costs to Customers

1. Anders Wire Company Example – Exhibit 5-9 pg 179

V.  Managing Customer Profitability

VI.  ABC and Service Companies – is it possible?

1. Customer costs
2. ABC model

VII.  Roadblocks to ABC Implementations

1. Lack of clear business purpose
2. Lack of senior management commitment
3. Delegating the project to consultants
4. Poor ABC model design
5. Resistance to change (by individuals as well as organizations)

NOTES:

ABC in action…

Tomco is a producer of small engine parts. They currently allocate $2,000,000 of overhead using direct labor hours as the base. They are thinking of using an activity based costing system to allocate the overhead. Tomco did extensive analysis of their processes and activities and under ABC, there will be four activities and four drivers as follows:

TOTAL

Data relating to the companies three products is as follows:

Required:

1)  Allocate Overhead to the three products using the current system

2)  Allocate Overhead to the three products using the ABC system

3)  Which is generally a better method of cost assignment? Why?

Chapter 5 Homework

Questions – 1, 3, 7, 12, 14, 19

Exercises – 20, 23, 24

Problems – 29, 37

Chapter 6 – Management Accounting Information for Activity and Process Decisions

I.  Decision Making

1. Identifying and defining the problem

2. Make predictions on costs

3. Evaluate and select the best course of action (alternative)

4. Implement the decision

5. Evaluate Performance

II.  Relevance – what is it and why do we care?

Relevant costs –

·  Expected FUTURE costs and revenues

·  DIFFER among alternative courses of action

Irrelevant costs –

·  Past costs

What is a sunk cost?

Is a sunk cost relevant or irrelevant?

Why is book value irrelevant in equipment-replacement decisions?

Exercise 6-29 - Determining what costs are relevant and which are not

III.  Make-or-Buy Decisions

1. Outsourcing
2. Avoidable costs

Exercise 6-32 – Make-or-Buy Decision

QUALITATIVE vs. QUANTITATIVE Factors in Decisions

Quantitative – can be measured

Qualitative – hard to measure

IV.  Facility Layout Systems

1. Theory of Constraints (TOC)
2. What is a bottleneck? Do you have any personal experiences with bottlenecks?
3. Throughput contribution
4. Investments
5. Operating costs
6. Different layout approaches
7. Process layout
8. Product layout
9. Cell (or Cellular) Manufacturing

V.  Inventory Costs and Processing Time

1. Batch production creates inventory costs
2. San Rafael Electric
3. cycle time
4. processing time
5. manufacturing cycle efficiency (MCE)
6. reorganization
7. analysis of relevant costs and benefits
8. summary of costs and benefits

VI.  Cost of Non-Conformance and Quality Issues

·  What is the cost of non-conformance (CONC) to quality standards?

1. Quality standards
2. Costs of quality control
3. Prevention costs
4. Appraisal costs
5. Internal failure costs
6. External failure costs
7. Cost of Quality Report (COQ)

VII.  JIT Manufacturing

1. Implications of JIT Manufacturing
2. Defect rates
3. Cycle times
4. % of on-time deliveries
5. Order accuracy
6. Actual production as a % of planned production
7. Actual machine time available compared with planned machine time available
8. Production Flows
9. Effect on WIP Inventory
10. Effect on Production Costs
11. Cost of Rework
12. Cost of carrying WIP Inventory
13. Benefits from Increased Sales

Chapter 6 Homework

Questions – 1, 2, 4, 9, 10, 12, 15, 16, 23, 24

Exercises – 29, 30, 32, 33, 37, 38

Problems – 43, 46

Chapters 5 and 6 Page 1 of 5