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Undercosting and
Overcosting Example
Jose, Roberta, and Nancy order
separate items for lunch.
Joses order amounts to
Roberta consumed
Nancys order is
Total
$14
30
16
$60
Undercosting and
Overcosting Example
$60 3 = $20
Roberta is
undercosted.
What Is ABC
Activity Based Cost (ABC) system is
A cost accounting system that uses
both unit and non-unit-based activity
drivers to assign costs to cost objects
(Hansen Mowen Guan)
P rodu ction :
Un its
Ru n s
Mode I
Mode II
Mode III
10,000
1 of 10,000
20,000
4 of 5,000
4,000
10 of 400
Mode II
$
90.00
4
10
1.25
Mode III
$ 20.00
2
10
2
Mode I
Dire ct m ate rials
$
50.00
Dire ct labor
60.00
Man u factu rin g ove rh e ad
99.00
Total
$
209.00
Mode II
$
90.00
80.00
132.00
$ 302.00
Mode III
$ 20.00
40.00
66.00
$ 126.00
Un its produ ce d
Dire ct labor (h r/u n it)
Total h ou rs
Mode II
20,000
4
80,000
Total h ou rs re qu ire d
118,000
$3,894,000
118,000
Mode I
Dire ct labor (h r/u n it)
Ove rh e ad rate pe r h ou r
Ove rh e ad pe r u n it
Mode III
4,000
2
8,000
$
$
3
33
99
Mode II
$
$
4
33
132
Mode III
2
$
33
$
66
Cos t pe r u n it
Targe t s e llin g price
209.00 x 1.25
Mode I
$
209.00
261.25
Mode II
$
90.00
80.00
132.00
$ 302.00
Mode II
$
302.00
377.50
Mode III
$ 20.00
40.00
66.00
$ 126.00
Mode III
$ 126.00
157.50
Assigning
overhead to products
is a
difficult process.
I agree!
Stage One
Identify significant
activities and assign overhead
costs to each activity in
proportion to resources used.
Lets begin
by identifying
our major
activities.
Stage Two
Identify cost drivers
appropriate to each activity
and allocate overhead to
the products.
Overhead assigned to
activities are called
activity cost pools.
Overhead Costs
Activity
must be
done on
each unit
produced.
Activity
Cost
Pools
Unit
Level
Batch
Level
ProductSustaining
Level
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Activity
performed
on each
batch
produced.
Identification
of Activity
Cost Pools
Facility
Level
Facility
cost pool
$507,400
Overhead Costs
Total budgeted cost = $3,894,000
Activity
Cost
Pools
Unit
Level
Batch
Level
ProductSustaining
Level
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
More
Cost
Pools
Identification
of Activity
Cost Pools
Facility
Level
Facility
cost pool
$507,400
Unit
Level
Batch
Level
ProductSustaining
Level
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Receiving/Inspection
cost pool $200,000
Material-Handling
cost pool $600,000
Quality-Assurance
cost pool $421,000
Packaging/Shipping
cost pool $250,000
Facility
Level
Facility
cost pool
$507,400
STAGE ONE
Various overhead
costs related
to machinery
Activity
cost
pool
Maintenance
Lubrication
Depreciation
Electricity
Computer Support
Calibration
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Mode I:
$28.20 per hr.
1 hr. per unit
$28.20 per unit
=$1,212,600
43,000
=
$28.20/hour
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
STAGE ONE
Calculation of
total setup cost
Activity
cost
pool
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Mode I: (1 Run)
$200 per run
10,000 units per run
= $.02 per unit
=$3,000
15 runs
=
$200
per run
STAGE ONE
Various overhead
costs related
to engineering
Activity
cost
pool
Engineering salaries
Engineering software
Engineering supplies
Depreciation
STAGE TWO
Allocate based
on engineering
transactions
Cost
Assignment
Mode I:
25% $700,000
10,000 units
= $17.50 per unit
Mode II:
45% $700,000
20,000 units
= $15.75 per unit
Mode III:
30% $700,000
4,000 units
= $52.50 per unit
STAGE ONE
Various overhead
costs related
to general
operations
Activity
cost
pool
Plant depr.
Property taxes
Plant mgmt.
Insurance
Plant maint.
Security
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Mode I:
$4.30 per hr.
Mode II:
$4.30 per hr.
Mode III:
$4.30 per hr.
Product
Cost
from
ABC
Here are the new product costs so far . . .
Direct materials
Direct labor
Machinery
Setup
Engineering
Facilities
Mode I
$ 50.00
60.00
28.20
0.02
17.50
12.90
Mode II
$ 90.00
80.00
35.25
0.04
15.75
17.20
Mode III
$ 20.00
40.00
56.40
0.50
52.50
8.60
Board
Mode I
Mode II
Mode III
Ove rh e ad
$ 200,000
200,000
200,000
%
6%
24%
70%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
1.20
=
2.40
=
35.00
Ove rh e ad
$ 600,000
600,000
600,000
%
7%
30%
63%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
4.20
=
9.00
=
94.50
Ove rh e ad
$ 421,000
421,000
421,000
%
20%
40%
40%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
8.42
=
8.42
=
42.10
Ove rh e ad
$ 250,000
250,000
250,000
%
4%
30%
66%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
1.00
=
3.75
=
41.25
Mode I
Direct materials $ 50.00
Direct labor
60.00
Machinery
28.20
Setup
0.02
Engineering
17.50
Facilities
12.90
Other
14.82
Total
$ 183.44
Mode II
$ 90.00
80.00
35.25
0.04
15.75
17.20
23.57
$ 261.81
Mode III
$ 20.00
40.00
56.40
0.50
52.50
8.60
212.85
$ 390.85
Product Diversity
Both original and ABC target selling prices are based
on (Cost 125%).
Tradition al cos tin g
ABC cos tin g
Origin al targe t s e llin g price
ABC targe t s e llin g price
Mode I
$
209.00
183.44
Mode II
$
302.00
261.81
Mode III
$ 126.00
390.85
261.25
229.30
377.50
327.26
157.50
488.56
[$183.44 1.25]
Cost
Drivers
A characteristic of an event or activity that results
in the incurrence of costs. In selecting a cost
driver, we must consider . . .
Degree of
Correlation
Behavioral
Effects
Cost of
Measurement
Transaction Costing
Usually
Result In
Activities
Paperwork
Transaction
processing
provides a
readily
measurable
gauge of
departmental
activity.
Storyboarding
A procedure used to develop a detailed process flow
chart, which visually represents activities and the
relationships among activities.
Step
1
Step
2
Step
3
Step
4
Activity-Based Costing
An effort is made to
account for as many
costs as possible as
direct costs of
production.
Indirect
Costs
Product-line profit
margins are hard
to explain
Total Cost
Cost of
inferior
decisions
resulting
from
inaccurate
information.
Design, implementation
and maintenance costs
Low
Low
Optimal
system
Information
System
High Accuracy
major activities.
Identify and evaluate new activities that can
improve future performance.
Non-Value-Added Costs
Suppose our production process looks like this:
Storage
Time
NVA
VA
NVA
Waiting
Time
NVA
Process
Time
= Valued-added activity
= Non-value-added activity
VA
Move
Time
NVA
Inspection
Time
NVA
Non-Value-Added Costs
Our goal is to reduce or eliminate the non-value-added activities.
Storage
Time
NVA
VA
NVA
Waiting
Time
NVA
Process
Time
= Valued-added activity
= Non-value-added activity
VA
Move
Time
NVA
Inspection
Time
NVA
Implementation
Problems
High proportion of
facility-level costs
Video ABC
Next ABM
What Is ABM
Activity Based Management (ABM)
is a systemwide, integrated approach that
focuses managements attention on activities
with the objectives of improving customer
value and increasing the profit achieved by
providing this value (Hansen Mowen Guan)
Use activity-based
costing systems for
Activity-Based management
Activity-Based Management
Design decisions
Design Decisions
Management can identify and evaluate new designs
to improve performance by evaluating how product
and process designs affect activities and costs.
Companies can work with their customers to
evaluate the costs and prices of alternative designs.
Responsibility Assignment
Compared
Rewards Compared
Conclusion
References
2009 South Western, A part of cengage learning, Accounting and
Control 6/e, Hansen/Mowen/Guan
2007 Mc Graw Hill, Management Control System 12/e,
Anthony/Robert/Govinda
2003 Prentice Hall Business, Cost Accounting 11/e,
Hongren/Data/Foster
2002 John Willey Son, Managerial Accounting 6/e,
Weygandt/Kieso/Kimmel
www.cimaglobal.com
www.cgma.com
http://www.mpdv-china.cn/en/why-use-manufacturing executionsystem-mes/
www.mbabullshit.com
www.flikcr.com