ch08

Document Sample
ch08 Powered By Docstoc
					        CHAPTER     8

Management Accounting
Information In the New
Business Environment
         Learning Objective 1


Explain the
fundamentals of
activity-based
costing (ABC) and
activity-based
management (ABM).
         Activity-Based Costing (ABC)

A method of attributing costs
to products based on:
• assigning costs of
  resources to activities
• assigning costs of
  activities to products


Costs            Activities     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:

                                          $3,000
    $9,000
   Overhead                        =     Overhead
                                        per product



  Costs            Production            Products
                  Departments
                    Relationship Between
                        UBC and ABC
Unit-Based Costing           Activity-Based Costing
      (UBC)                    (ABC) Hierarchical
  Model of Costs              Product Cost Model
       Costs of                       Costs of
   Direct Materials             Unit-Level Activities

       Costs of                      Costs of
     Direct Labor              Batch-Level Activities

Variable Manufacturing              Costs of
   Overhead Costs             Product Line Activities

 Fixed Manufacturing             Costs of Facility
   Overhead Costs                Support Activities
       ABC—Allocating Resource Costs
               to Activities
What is the hierarchical product cost model?
ABC—Allocating Resource Costs
        to Activities
            Facility Support Activities

            Product Line Activities

            Batch-Level Activities

• Unit-Level Activities
• Take place each time a unit is produced
• Packing
• Assembly
• Direct Materials, Direct Labor
• Variable Manufacturing Overhead
ABC—Allocating Resource Costs
        to Activities
        Facility Support Activities

         Product Line Activities


• Batch-Level Activities
• Number of setups
• Setup hours
• Movements of materials
• Orders for non-stocked items
• Inspections
           Unit-Level Activities
ABC—Allocating Resource Costs
        to Activities
       Facility Support Activities


• Product Line Activities
• Engineering and design changes
• Warehousing of product line materials
• Production line dedicated supervisors
• Purchasing
• Receiving and shipping

           Batch-Level Activities

           Unit-Level Activities
ABC—Allocating Resource Costs
        to Activities

• Facility Support Activities
• Property taxes
• Plant security
• Landscaping
• Accounting and legal
• General administrative salaries

            Product Line Activities

            Batch-Level Activities

             Unit-Level Activities
                Cross-Subsidization

Does a hammer really cost THAT MUCH?
                                               ?
  $9,000
Overhead
                                   =
                                          Overhead
                                             per
                                           product

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

Does a hammer really cost THAT MUCH?


           
                                  $3,000
 $9,000
Overhead                    =    Overhead
                                    per
                                  product
               3 Products


   1 Hammer =    $3,004 !?
                   Cross-Subsidization

  Does a hammer really cost THAT MUCH?


    $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).
            What are the Hazards of
              Allocating Costs?
Product Cost Distortions
     Hazards of Allocating Costs




 Product profitability before overhead
               allocation:
            Hammer   Clock        Ferrari
Revenue         $8      $20      $100,000
Materials        2       10        70,000
Labor            2        5        25,000
Profit          $4      $ 5      $ 5,000
             Hazards of Allocating Costs

         Product profitability after
           overhead allocation:
              Hammer         Clock           Ferrari
 Revenue    $     8          $    20       $100,000
 Materials        2               10         70,000
 Labor            2                5         20,000
 Overhead     3,000            3,000          3,000
 Profit    $(2,996)         $(2,995)       $ 7,000

   In actuality, most of the $9,000 manufacturing
overhead is attributable to the Ferrari, revealing it to
               be the real money loser.
           Hazards of Allocating Costs
         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.
              Hammer        Clock       Ferrari
Revenue    $     8          $    20       $100,000
Materials        2               10         70,000
Labor            2                5         25,000
Overhead     3,000            3,000          3,000
Profit    $(2,996)         $(2,995)       $ 2,000
            Hazards of Allocating Costs

The
 result?

              Hammer    Clock     Ferrari
Revenue                          $100,000
Materials                          70,000
Labor                              25,000
Overhead                            8,990
Profit                          $ (3,990)
     Activity-Based Management (ABM)

Managing costs, quality, and timeliness of
activities through the identification and use of
Cost Drivers and Performance Measures.
               Cost Drivers


Costs             Activities          Products



          Performance Measures
           Learning Objective 2



Describe total quality
management (TQM)
and costs of quality
(COQ).
What is Total Quality
Management (TQM)?
             TQM
             TQM
                 Total Quality
               Management (TQM)
        The Secret to Success?
The Old Way    “Watch the costs
              and the profits will
                  take care of       The New Way
                 themselves.”

              “Watch the Quality
 Andrew       and the profits will
 Carnegie        take care of
                themselves.”           W. Edward
                                        Deming
Total Quality Management (TQM)
     Define SPC—Statistical
       Process Control
      What are the Four
    Costs of Quality (COQ)?



$
             Define Each Cost of Quality
                       (COQ)
Prevention Costs:


Appraisal Costs:


Internal Failure Costs:



External Failure Costs:
 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

				
DOCUMENT INFO