based cost management system

8/3/2019 Based Cost Management System

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Activity-Based Cost

Management Systems

18

Chapter Eighteen


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Froilan Calixto

Chris LeeVincent Steve Peralta

May Arboleda-Peralta


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Traditional, Volume-Based Product-

Costing SystemAerotech produces three complex printed circuit boards

referred to as Mode I, Mode II, and Mode III.

The following information is obtained from companyrecords:

Mode I Mode II Mode III

Production:

Un its 10,000 20,000 4,000

Ru n s 1 of 10,000 4 of 5,000 10 of 400


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Costing System Mode I Mode II Mode IIIUn its produ ce d 10,000 20,000 4,000

Dire ct labor (h r/u n it) 3 4 2

Total h ou rs 30,000 80,000 8,000

Total h ou rs re qu ire d 118,000

Budgeted manufacturing overhead $3,894,000

Budgeted direct-labor hours 118,000

= $33 per hour


Dire ct labor (h r/u n it) 3 4 2

Ove rh e ad rate pe r h ou r 33$ 33$ 33$

Ove rh e ad pe r u n it 99$ 132$ 66$


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Costing SystemWith these product costs, Aerotech established targetselling prices (Cost 125%).


Dire ct mate rials 50.00$ 90.00$ 20.00$

Dire ct labor 60.00 80.00 40.00Man u factu rin g ove rh ead 99.00 132.00 66.00

Total 209.00$ 302.00$ 126.00$


Cos t pe r u n it 209.00$ 302.00$ 126.00$

Targe t s e llin g price 261.25 377.50 157.50

209.00 x 1.25


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Costing System

Aerotech wishes to see what target selling priceswould be suggested when using activity-based

costing.

Lets see how ABC works.


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Activity Based Costing System (ABC)

ABC systems follow atwo-stage procedure toassign overhead costs

to products.

Assigningoverhead toproducts is a

difficult process.

I agree!


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to products.

Lets beginby identifying

our major

activities.

Stage One

Identify significantactivities and assign overhead

costs to each activity inproportion to resources used.


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to products.

Overhead assigned toactivities are called

activity cost pools.

Stage Two

Identify cost driversappropriate to each activityand allocate overhead to

the products.


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Overhead CostsTotal budgeted cost = $3,894,000

ActivityCostPools

Machinerycost pool

$1,212,600

Setupcost pool$3,000

Engineeringcost pool$700,000

Facilitycost pool$507,400

UnitLevel

BatchLevel

Product-

SustainingLevel

FacilityLevel

Identificationof Activity

Cost Pools

Activitymust be

done oneach unitproduced.

Activityperformedon eachbatch

produced.

Activities needed to supportan entire product line

Activity required in orderfor the productionprocess to occur.


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Overhead CostsTotal budgeted cost = $3,894,000

ActivityCostPools

Machinerycost pool

$1,212,600

Setupcost pool$3,000

Engineeringcost pool$700,000

Facilitycost pool$507,400

MoreCostPools

UnitLevel

BatchLevel

Product-

SustainingLevel

FacilityLevel

Identificationof Activity

Cost Pools


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Receiving/Inspectioncost pool $200,000

Material-Handlingcost pool $600,000

Quality-Assurancecost pool $421,000

Packaging/Shippingcost pool $250,000

Machinery

cost pool$1,212,600

Setup

cost pool$3,000

Engineering

cost pool$700,000

Facility

cost pool$507,400

Unit

Level

Batch

Level

Product-

Sustaining

Level

Facility

Level


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Various overhead

costs relatedto machinery

Maintenance

Depreciation

Computer Support

Lubrication

Electricity

Calibration

Machinery Cost Pool

Total budgeted cost = $1,212,600

Activitycost

pool

STAGE ONE


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Calculate

the poolrate

Budgeted Machinery Costs $1,212,600

Budgeted Machine Hours 43,000$28.20/hour

Cost

Assignment

STAGE TWO

==

Mode I:

$28.20 per hr.

1 hr. per unit

$28.20 per unit

Mode II:

$28.20 per hr.

1.25 hr. per unit

$35.25 per unit

Mode III:

$28.20 per hr.

2 hr. per unit

$56.40 per unit


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Calculate

the poolrate

Budgeted Setup Costs $3,000

Planned Production Runs 15 runs$200 per run

Cost

Assignment

STAGE TWO

==

Mode I: (1 Run)

= $.02 per unit

$200 per run

10,000 units per run

Mode II: (4 Runs)

= $.04 per unit

$200 per run

5,000 units per run

Mode III: (10 Runs)

= $.50 per unit

$200 per run

400 units per run


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Various overhead

costs relatedto engineering

Engineering salaries

Engineering supplies

Engineering software

Depreciation

Engineering Cost Pool

Total budgeted cost = $700,000

Activitycost

pool

STAGE ONE


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Allocate based

on engineeringtransactions

Cost

Assignment

STAGE TWO

Engineering Cost PoolTotal budgeted cost = $700,000

Mode I:

= $17.50 per unit

25% $700,000

10,000 units

Mode II:

= $15.75 per unit

45% $700,000

20,000 units

Mode III:

= $52.50 per unit

30% $700,000

4,000 units


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Various overheadcosts related

to generaloperations

Plant depr.

Plant mgmt.

Plant maint.

Property taxes

Insurance

Security

Facility Cost Pool

Total budgeted cost = $507,400

Activitycost

pool

STAGE ONE


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Calculate

the poolrate

Budgeted Facilities Cost $507,400

Budgeted Direct-Labor Hours 118,000$4.30/hour

Cost

Assignment

STAGE TWO

=

=

Mode I:$4.30 per hr.

3 hr. per unit

$12.90 per unit

Mode II:$4.30 per hr.

4 hr. per unit

$17.20 per unit

Mode III:

$4.30 per hr.

2 hr. per unit

$8.60 per unit


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Product Cost from ABCHere are the new product costs so far . . .Mode I Mode II Mode III

Direct materials 50.00$ 90.00$ 20.00$

Direct labor 60.00 80.00 40.00

Machinery 28.20 35.25 56.40

Setup 0.02 0.04 0.50

Engineering 17.50 15.75 52.50Facilities 12.90 17.20 8.60


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Other Overhead CostsBoard Ove rh e ad % Un its = Cos t/Un it

Mode I 200,000$ 6% 10,000 = 1.20$

Mode II 200,000 24% 20,000 = 2.40

Mode III 200,000 70% 4,000 = 35.00

Receiving and Inspect ion Cost Pool

Board Ove rh e ad % Un its = Cos t/Un it

Mode I 600,000$ 7% 10,000 = 4.20$

Mode II 600,000 30% 20,000 = 9.00

Mode III 600,000 63% 4,000 = 94.50

Material-Handling Cos t P ool


Mode I 421,000$ 20% 10,000 = 8.42$

Mode II 421,000 40% 20,000 = 8.42

Mode III 421,000 40% 4,000 = 42.10

Quality-Assu rance Cost P ool


Mode I 250,000$ 4% 10,000 = 1.00$

Mode II 250,000 30% 20,000 = 3.75

Mode III 250,000 66% 4,000 = 41.25

Packaging and Shipping Cost Pool


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Mode I 250,000$ 4% 10,000 = 1.00$

Mode II 250,000 30% 20,000 = 3.75

Mode III 250,000 66% 4,000 = 41.25

Packaging and Shipping Cost Pool


Mode I 421,000$ 20% 10,000 = 8.42$

Mode II 421,000 40% 20,000 = 8.42

Mode III 421,000 40% 4,000 = 42.10

Quality-Assu rance Cost P ool

Other Overhead CostsBoard Ove rh e ad % Un its = Cos t/Un it

Mode I 200,000$ 6% 10,000 = 1.20$

Mode II 200,000 24% 20,000 = 2.40

Mode III 200,000 70% 4,000 = 35.00

Receiving and Inspect ion Cost Pool


Mode I 600,000$ 7% 10,000 = 4.20$

Mode II 600,000 30% 20,000 = 9.00

Mode III 600,000 63% 4,000 = 94.50

Material-Handling Cos t P ool

$14.82


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Product Cost from ABC

These are the new product costs when Aerotech usesABC.


Direct materials 50.00$ 90.00$ 20.00$

Direct labor 60.00 80.00 40.00

Machinery 28.20 35.25 56.40

Setup 0.02 0.04 0.50

Engineering 17.50 15.75 52.50Facilities 12.90 17.20 8.60

Other 14.82 23.57 212.85

Total 183.44$ 261.81$ 390.85$


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Product DiversityBoth original and ABC target selling prices are based

on (Cost 125%).


Tradition al cos tin g 209.00$ 302.00$ 126.00$

ABC cos tin g 183.44 261.81 390.85

Origin al targe t s e llin g price 261.25 377.50 157.50

ABC targe t s e llin g price 229.30 327.26 488.56

[$209.00 1.25] [$183.44 1.25]

The selling price of Mode I and II are reducedand the selling price for Mode III is increased.


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Product DiversityCan you identify any problems Aerotech is likely to

face as a result of this distortion?


Tradition al cos tin g 209.00$ 302.00$ 126.00$ABC cos tin g 183.44 261.81 390.85

Cos t dis tortion pe r u nit 25.56 40.19 (264.85)

Un its produ ce d 10,000 20,000 4,000

Total cos t dis tortion 255,600 803,800 (1,059,400)

Traditional costing understates the costof complex, low volume products.


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ABC: Some Key Issues

The Past

Small number ofproducts which didnot differ much inrequiredmanufacturingsupport.

Labor was the

dominant element inthe cost structure.

The Present

Numerous productswith more andcomplicatedproductionrequirements.

Labor is becoming anever smaller part

component of totalproduction costs.


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Cost DriversA characteristic of an event or activity that results

in the incurrence of costs. In selecting a costdriver, we must consider . . .

Degree ofCorrelation

Cost ofMeasurement

BehavioralEffects


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Homogeneous Activity Cost PoolsA homogeneous cost pool is a grouping of overhead

costs in which each cost component is consumed inroughly the same proportion by each product line.

A homogeneous cost pool

uses a single cost driver.


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Transaction Costing

Activities Paperwork

Usually

Result In

Transaction

processingprovides a

readilymeasurable

gauge ofdepartmental

activity.


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StoryboardingA procedure used to develop a detailed process flow

chart, which visually represents activities and therelationships among activities.

Step1

Step2

Step3

Step4

These are the steps wefollow to build amemory board.


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Direct versus Indirect CostsVolume-Based Costing

All production costsexcept direct materials

and direct labor arelumped together in oneoverhead cost pool.

Activity-Based Costing

An effort is made toaccount for as many

costs as possible asdirect costs ofproduction.

IndirectCosts


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Indicators of Need for ABC

Line managers do notbelieve the product

costs reports

Marketing does notuse costs reports for

pricing decisions

Product-line profitmargins are hard

to explain

Sales are increasing,but profits are declining.

Some products thathave reported high

profit margins are notsold by competitors

Direct labor is asmall percentage

of total costs


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Optimal Product-Costing System

High

High

Low

Low

Cost

InformationSystemAccuracyOptimal

system

Total Cost

Design, implementationand maintenance costs

Cost of

inferiordecisionsresulting

frominaccurate

information.


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Cost Management Systems

Measure the cost of resources consumed.

Identify and eliminate non-value-added costs.

Determine the efficiency and effectiveness of all

major activities. Identify and evaluate new activities that can

improve future performance.

Objectives


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Non-Value-Added Costs

VA = Valued-added activityNVA = Non-value-added activity

Our goal is to reduce or eliminate the non-value-added activities.

StorageTime

WaitingTime

ProcessTime

MoveTime

InspectionTime

VA NVANVANVANVA


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ABC in the Service Industry

ImplementationProblems

High proportion of

facility-level costs

Activities tend tobe nonrepetitive

human tasks.


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End of Chapter 18This is

real value-addedtime!

based cost management system

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